Definition
Problem in regression models where predictor variables are correlated with the error term , i.e.,
Common causes
- Omitted variable bias: There is an important factor that is not included in the model.
- Simultaneity: Bidirectional relationship (e.g., cost & demand influences each other).
- Measurement error: is measured with high error.
Consequences
OLS estimator becomes biased and inconsistent. Interpretation of coefficient could be incorrect.