Your first candidate for a regression to identify the effect of X1 on Y is: Yi = ?0 + ?1X1i + ?2X2i + Ui, where X2 is a control variable. Suppose a member of your consulting team suggests to you that another variable Ri should be a control that is also included in your regression, in order for you not to be worried about the endogeneity problem. What condition could you credibly test using data on Y, X1, X2, and R which could justify the inclusion of Ri as a control in your regression?
A. spcorr(Ri, Yi (Xi1, Xi2)) ? 0
B. Ri is exogenous.
C. Ri has a strong correlation with X2.
D. Ri has no effect per se on Yi.
Answer: A
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