Linear Regression with an Estimated Regressor: Applications to Aggregate Indicators of Economic Development

Department

Economics, Finance and Quantitative Analysis

Document Type

Article

Publication Date

3-1-2016

Abstract

This study examines the consequences of using an estimated aggregate measure as an explanatory variable in linear regression. We show that neglecting the seemingly small sampling error in the estimated regressor could severely contaminate the estimates. We propose a simple statistical framework to account for the error. In particular, we apply our analysis to two aggregate indicators of economic development, the Gini coefficient and sex ratio. Our findings suggest that the impact of the estimated regressor could be substantially underestimated, when the sampling error is not accounted for.

Journal Title

Empirical Economics

Journal ISSN

0377-7332

Volume

50

Issue

2

First Page

299

Last Page

316

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