Consider the following simple regression model y = 
0 + 1x1 + u. Suppose z is an instrument for x.
Which of the following statements is true?
A. The condition Cov(z,u) = 0 can be tested statistically.
B. The condition Cov(z,x) 
0 cannot be tested statistically.
C. The instrumental variables estimator is always biased if Cov(x,u) 
0.
D. The ordinary least squares estimator is unbiased if Cov(x,u) 
0 .
Answer: C
Economics
