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Endogeneity (economics)

 

 
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Endogeneity (economics)
 
 
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In an economic
Economics

File:Ballard Farmers' Market - vegetables.jpgEconomics is the Social sciences that studies the Production theory basics, Distribution , and Consumption of Good and Service ....
  model
Model (economics)

In economics, a model is a theory construct that represents economic Process by a set of variables and a set of logical and/or quantitative relationships between them....
, parameters or variables are said to be endogenous when they are predicted by other variables in the model.

For example, in a simple supply and demand
Supply and demand

...
 model, when predicting the quantity demanded in equilibrium, the price is endogenous because producers change their price in response to demand and consumers change their demand in response to price. In contrast, a change in consumer
Consumer

Consumer is a broad label that refers to any individuals or household that use Good generated within the economic system. The concept of a consumer is used in different contexts, so that the usage and significance of the term may vary....
 tastes or preference
Preference

Preference is a concept, used in the social sciences, particularly economics. It assumes a real or imagined "choice" between alternatives and the possibility of rank ordering of these alternatives, based on happiness, satisfaction, gratification, enjoyment, utility they provide....
s would be an exogenous
Exogenous

Exogenous refers to an action or object coming from outside a system. It is the opposite of endogenous, something generated from within the system....
 change on the demand curve
Demand curve

In economics, the demand curve can be defined as the Graph depicting the relationship between the price of a certain commodity, and the amount of it that consumers are willing and able to purchase at that given price....
.






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In an economic
Economics

File:Ballard Farmers' Market - vegetables.jpgEconomics is the Social sciences that studies the Production theory basics, Distribution , and Consumption of Good and Service ....
  model
Model (economics)

In economics, a model is a theory construct that represents economic Process by a set of variables and a set of logical and/or quantitative relationships between them....
, parameters or variables are said to be endogenous when they are predicted by other variables in the model.

For example, in a simple supply and demand
Supply and demand

...
 model, when predicting the quantity demanded in equilibrium, the price is endogenous because producers change their price in response to demand and consumers change their demand in response to price. In contrast, a change in consumer
Consumer

Consumer is a broad label that refers to any individuals or household that use Good generated within the economic system. The concept of a consumer is used in different contexts, so that the usage and significance of the term may vary....
 tastes or preference
Preference

Preference is a concept, used in the social sciences, particularly economics. It assumes a real or imagined "choice" between alternatives and the possibility of rank ordering of these alternatives, based on happiness, satisfaction, gratification, enjoyment, utility they provide....
s would be an exogenous
Exogenous

Exogenous refers to an action or object coming from outside a system. It is the opposite of endogenous, something generated from within the system....
 change on the demand curve
Demand curve

In economics, the demand curve can be defined as the Graph depicting the relationship between the price of a certain commodity, and the amount of it that consumers are willing and able to purchase at that given price....
. In this case, the price variable is said to have total endogeneity once the demand and supply curves are known.

In Econometrics


In econometrics
Econometrics

Econometrics is concerned with the tasks of developing and applying quantitative or statistical methods to the study and elucidation of economic principles....
 the problem of endogeneity occurs when the independent variable
Independent variable

The terms "dependent variable" and "independent variable" are used in similar but subtly different ways in mathematics and statistics as part of the standard terminology in those subjects....
 is correlated
Correlation

In probability theory and statistics, correlation indicates the strength and direction of a linear relationship between two random variables....
 with the error term in a regression
Regression

Regression could refer to:* Regression , a defensive reaction to some unaccepted impulses* Past life regression, a process claiming to retrieve memories of previous lives...
 model. This implies that the regression coefficient in an OLS
OLS

OLS can stand for:* IATA code for Nogales International Airport in Arizona* Ordinary least squares, a method used in regression analysis* Ottawa Linux Symposium...
 regression is biased
Bias of an estimator

In statistics, the difference between an estimator's expected value and the true value of the parameter being estimated is called the bias. An estimator or decision rule having nonzero bias is said to be biased....
. There are many methods of overcoming this, including instrumental variable
Instrumental variable

In statistics, econometrics, epidemiology and related disciplines, the method of instrumental variables is used to estimate causal relationships when controlled experiments are not feasible....
 regression and Heckman
James Heckman

James Joseph Heckman is an American economist and Nobel laureate. He is the Henry Schultz Distinguished Service Professor of Economics at the University of Chicago, Distinguished Chair of Microeconometrics at University College, London, and University College, Dublin....
 selection correction.

In time series

The endogeneity problem is particularly relevant in the context of time series
Time series

In statistics, signal processing, and many other fields, a time series is a sequence of data points, measured typically at successive times, spaced at time intervals....
 analysis of causal processes. It is common for some factors within a causal system to be dependent for their value in period n on the values of other factors in the causal system in period n-1. Suppose that the level of pest infestation is independent of all other factors within a given period, but is influenced by the level of rainfall and fertilizer in the preceding period. In this instance it would be correct to say that infestation is exogenous
Exogenous

Exogenous refers to an action or object coming from outside a system. It is the opposite of endogenous, something generated from within the system....
 within the period, but endogenous
Endogenous

The word endogenous means "arising from within", the opposite of exogenous....
 over time.

See also

  • Virtuous circle and vicious circle
    Virtuous circle and vicious circle

    A virtuous circle or a vicious circle is a complex of events that reinforces itself through a feedback loop toward greater instability. A virtuous circle has favorable results, and a vicious circle has deleterious results....
  • Heterogeneity