Introduction to econometrics (3rd ed., p. 180). Boston: Addison-Wesley.

Introduction to econometrics (3rd ed., p. 180). Boston: Addison-Wesley.

6.7B:

The researcher in this scenario has enough information to determine accurately whether time spent in prison has a permanent effect on a person’s wage rate. However, they need to be careful to ensure that they do not have too many variables. This matters because it is possible that multicollinearity exists between multiple variable, or regressors. This occurs when one regressor is highly, or perfectly correlated to another regressor causing a linear combination with each other (Stock, 2011, p. 199). Based off of the data the researcher is collecting, I don’t think any of them are too highly correlated with each other to cause a problem. It will just be important to to look at like for like data; as in looking at each variable while holding other variables constant.

Stock, J., & Watson, M. (2011). Introduction to econometrics (3rd ed., p. 199). Boston: Addison-Wesley.

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