A researeher is interested in estimating the effect of civil war on economic gro

Question

A researeher is interested in estimating the effect of civil war on economic growth. She plans to use a sample of 100 countries to estimate the following structural model: growth = beta_0 + beta_1 civil + beta_2 landlocked + u where growth is the country's 2012 real GDP growth, civil is a dummy variable equal to 1 if the country has experienced a civil war in the past ten years, and landlocked is a dummy variable equal to 1 if the country is landlocked. Is civil endogenous in this equation? Explain.

Explanation / Answer

"Civil" is an endogenous variable.

A civil war initiates out of unrest generated among residents due to factors like poor standard of living, political corruption or generate widespread dissatisfaction. If a civil war breaks out, it erodes a country's resources and leads to lower economic growth, therefore its coefficient (Beta1) is negative - existence of a civil war lowers the economy's growth.

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