what is Omitted variable bias formula
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Omitted variable bias occurs when a statistical model omits a relevant variable that is correlated with both the dependent variable and the independent variable(s), leading to biased and inconsistent estimates of the coefficients of the independent variables.
The formula for omitted variable bias is:
b1 = β1 + β2 * δ2
where:
This formula indicates that the estimated coefficient of X1 is equal to the true coefficient of X1 plus a bias term that is a product of the true coefficient of X2 and the correlation between X1 and X2. Thus, if X2 is omitted from the model and it is correlated with X1, the estimated coefficient of X1 will be biased and inconsistent.