The correlation between the regressor educ and the error term u is most likely caused by

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BlackTom AI · Accepted Answer

The question asks about the source of a correlation between the regressor educ (education) and the error term u in a regression model.

Because the provided answer indicates that the cause is 'the omitted regressor ability,' we can reason why this is the most plausible culprit in standard econometric settings.

First, consider what happens when an important determinant of the dependent variable is left out of the regression. If ability influences both education (educ) and the outcome we are modeling and is not included as a regressor, then the error term u will absorb the effect of ability. Since ability is correlated with educ, this induces a correlation between educ and u, violating the exogeneity assumption and biasing OLS estimates.

Next, the omitted-variable bias mechanism explains the direction and magnitude of the problem: individuals with higher ability may tend to obtain more education and also have different outcomes (the dependent variable) regardless of education itself; omitting ability means part of its effect is wrongly attributed to education, creating endogeneity.

If the omitted variable were something else that does not systematically relate to educ, we would expect little or no correlation between educ and u; thus, we’d have a more legitimate OLS estimate. However, in most contexts, ability is a classic, strong candidate for an omitted variable that links both education decisions and outcomes.

Additionally, other common sources of endogeneity—such as measurement error in educ or simultaneity between education and the outcome—could also cause correlation between educ and u, but the given option points directly to omitted ability as the central, widely recognized cause.

In summary, the logic is that ability affects both educational attainment and the outcome, and failing to control for ability leaves its influence in the error term, which becomes correlated with the education regressor. This is the core reason for the described correlation.

If other potential issues were present, they would need separate discussion, but with the stated answer, the omitted regressor ability is the primary explanation for the endogeneity observed here.

The correlation between the regressor educ and the error term u is most likely caused by

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