On the Ambiguous Consequences of Omitting Variables

Tinbergen Institute Discussion Paper 15-061/III

24 Pages Posted: 22 May 2015

See all articles by Giuseppe De Luca

Giuseppe De Luca

University of Palermo

J.R. Magnus

Vrije Universiteit Amsterdam, School of Business and Economics

Franco Peracchi

University of Rome Tor Vergata - Department of Economics and Finance; University of Rome Tor Vergata - Centre for International Studies on Economic Growth (CEIS); EIEF

Date Written: May 21, 2015

Abstract

This paper studies what happens when we move from a short regression to a long regression (or vice versa), when the long regression is shorter than the data-generation process. In the special case where the long regression equals the data-generation process, the least-squares estimators have smaller bias (in fact zero bias) but larger variances in the long regression than in the short regression. But if the long regression is also misspecified, the bias may not be smaller. We provide bias and mean squared error comparisons and study the dependence of the differences on the misspecification parameter.

Keywords: Omitted variables, Misspecification, Least-squares estimators, Bias, Mean squared error

JEL Classification: C13, C51, C52

Suggested Citation

De Luca, Giuseppe and Magnus, Jan R. and Peracchi, Franco, On the Ambiguous Consequences of Omitting Variables (May 21, 2015). Tinbergen Institute Discussion Paper 15-061/III. Available at SSRN: https://ssrn.com/abstract=2609261 or http://dx.doi.org/10.2139/ssrn.2609261

Giuseppe De Luca (Contact Author)

University of Palermo ( email )

Viale delle Scienza
Palermo, 90128
Italy

Jan R. Magnus

Vrije Universiteit Amsterdam, School of Business and Economics ( email )

De Boelelaan 1105
Amsterdam, 1081HV
Netherlands

Franco Peracchi

University of Rome Tor Vergata - Department of Economics and Finance ( email )

Via di Tor Vergata
Rome, Lazio 00133
Italy

University of Rome Tor Vergata - Centre for International Studies on Economic Growth (CEIS) ( email )

Via Columbia, 2
Rome, I-00133
Italy

EIEF ( email )

via Sallustiana 62
Rome, 00187
Italy

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