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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