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Can the use of proxy variables solve the omitted variable bias in cases where unobservable characteristics...

Can the use of proxy variables solve the omitted variable bias in cases where unobservable characteristics might be important?

Math   Statistics-And-Probability   
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Answer #1

If X* is a proxy for X and it can be included in building the model as a proxy for X and this can result in decrease in the omitted variable bias. To eliminate omitted variable bias in the regression, X* needs to be very similar to X implying a high correlation between both. This would make sure the relationship between dependent variable and X or X* is similar.

therefore we can say :

YES, the use of proxy variables can solve the omitted variable bias in cases where unobservable characteristics might be important

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