Consider the following population regression model relating the dependent variable y* and the regressor X*,
However, during the data collection, the regressor is measured with error, i.e., the observed regressor is
X=X* +V
a) Suppose Cov(, V,) 0, please show why OLS estimator will be biased.
b) If there exists an exogenous variable Z which is a valid instrument for X, please state two
assumptions that Z should satisfy.
