Question: 12.10 Two classmates are comparing their answers to an assignment. One classmate has specified an instrumental variable regression model Yi = b0 + b1Xi +

12.10 Two classmates are comparing their answers to an assignment. One classmate has specified an instrumental variable regression model Yi = b0 + b1Xi + b2Wi + ui, using Zi as an instrument. The other student has specified the same model, but has omitted Wi.

a. The first student says that if Zi and Wi are correlated, then the second student’s IV estimator will not be consistent. Is the first student right about this?

b. The second student argues that if in the true model b2 = 0, then their IV estimator will be consistent. Is the second student correct in saying this?

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