Endogeneity (economics)

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In an economic model, an endogenous change is one that comes from inside the model and is explained by the model itself. Endogeneity is the degree to which a variable's value can be explained by the model.

For example, in the simple supply and demand model, suppose that there is a change in consumer tastes or preferences; this would be an exogenous change on the demand curve. However, the change in equilibrium price resulting can now be derived given only the supplied (exogenous) variables, and is an endogenous output of the model. Therefore, the price variable has total endogeneity in this model (once the demand and supply curves are known).

Certain models include the time component and incorporate the change component in the model, thereby fully explaining change (in the context of the model). For examples see Endogenous growth theory.

Endogeneity of explanatory variables can cause difficulties in econometric regressions (e.g. making a simple OLS regression biased).[1] These are "endogeneity problems".


  1. ^ Schafgans, Marcia (2004). Advanced Econometrics Part 2: Endogeneity: IV and GMM. London School of Economics. Retrieved on 2007-11-02.
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