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:

Marginal Costs

The increase in total cost that arises from producing one additional unit of a good or service.

Marginal Benefits

The additional satisfaction or utility a consumer receives from consuming one more unit of a good or service.

Net Benefit

The total benefits of a decision or action minus the total costs associated with that decision or action.

Marginal Cost

The expense associated with manufacturing an extra unit of a product.