OLS Coefficients Are Biased When There Is a Lagged Dependent

question 4

Multiple Choice

OLS coefficients are biased when there is a lagged dependent variable and fixed effects in the same model. Which of the following statements is most accurate about using OLS when there is a lagged dependent variable and fixed effects in the same model?

• A) We should never use OLS in this situation.
• B) Instrumental variables are easier to use OLS in this situation.
• C) OLS can produce coefficient estimates that are biased, but still on average closer to the true values in this situation.
• D) OLS performs worse in this situation when we have many observations for each unit.

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Definitions:

Collection on Account

This term refers to the payment received by a business from its customers against the outstanding invoices or credits.

Journal Entry

A record in the accounting ledger that represents a single transaction and its effects on various accounts, detailing debits and credits.

Subsidiary Ledger

A subsidiary ledger is a detailed ledger that contains account information related to a specific master ledger account.

Allowance Account

An account used in accounting to estimate and offset losses that may arise from receivables that are not likely to be collected.