Consider the following model Yit = a + Ayt-1 + Xie + ut i=1,2,...,N; t=1,...,T U...

 

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Consider the following model Yit = a + Ayt-1 + Xieß + ut i=1,2,...,N; t=1,...,T U₁₁ = μ₁ + V₁₁ Where μ-tid (0,0) and vi~iid(0,02) Where μ represents individual effects and Xit is vector of strictly exogenous variables. 1)Explain why and how does endogeneity problem occur in the above model. 2)What are the consequences of the endogeneity occurred in the above model. 3) Explain which estimators can give consistent and efficient estimates of the parameters when Tis small relative to N. 4) Explain how the above model can be consistently estimated when T is relatively large. (1) Consider the following model Yit = a + Ayt-1 + Xieß + ut i=1,2,...,N; t=1,...,T U₁₁ = μ₁ + V₁₁ Where μ-tid (0,0) and vi~iid(0,02) Where μ represents individual effects and Xit is vector of strictly exogenous variables. 1)Explain why and how does endogeneity problem occur in the above model. 2)What are the consequences of the endogeneity occurred in the above model. 3) Explain which estimators can give consistent and efficient estimates of the parameters when Tis small relative to N. 4) Explain how the above model can be consistently estimated when T is relatively large. (1)

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1The endogeneity problem arises in the given model because the error term u it is correlated with one or more explanatory variables This occurs becaus... View the full answer