1.6 Specification of the Linear Model Flashcards
1
Q
What happens to our model if we incorrectly omit variables? Ie the model is under specified.
A
Our estimator is biased unless X1’X2=0 which is extremely unlikely since it relies on them being orthogonal
2
Q
What happens to our estimator if we over specify?
A
The estimator is still unbiased but it has a larger variance so becomes less efficient
