Suppose that average worker productivity at manufacturing firms (avgprod) depends on two factors, average hours of training (avgtrain) and average worker ability (avgabil): avgprod = ?? + ??avgtrain + ??avgabil + u. Assume that this equation satisfies the Gauss-Markov assumptions. If grants have been given to firms whose workers have less than average ability, so that avgtrain and avgabil are negatively correlated, what is the likely bias in ??? obtained from the simple regression of avgprod on avgtrain?
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Second, the question tells us that avgtrain and avgabil are negatively correlated. This means that firms with less able workers tend to have more training. Third, we are asked about the bias in the estimate of β2 from a simple regression of avgprod on Show more…
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