<p>You are saying: $y$ is regressed on $x_1$ and $x_2$, say, and you think it would be better to use <em>cluster errors</em> since you expect $y$ is correlated with abilities for each person.</p>

<p>First, $y$ is naturally correlated with the error term $u$ (if you mean the error term by "abilities") because $u$ is a part of $y$. You have no problems with that; $y$ is always strongly correlated with $u$. It also has nothing to do with <em>cluster errors</em>.</p>

<p>If you happen to mean <em>cluster standard errors (SE)</em> by "cluster errors", and if you are saying that you would use cluster SE because $x_1$ is correlated with $u$, I would say that the regressor-error correlation (endogeneity) has nothing to do with cluster SE, what so ever. Cluster SE provides valid inference when the the error term show within-cluster (auto)correlation.</p>

<p>Please enlighten me if I misinterpreted your question.</p>

CC BY-SA 4.0
2018-05-02T11:49:36.207Z
2018-07-18T12:46:04.520Z
2018-07-18T12:46:04.520Z
chan1142
<p>I have a regression of wage on several variables, such as education, marriage and so on. I want to explain that it would be a better idea to use cluster errors, since we expect the wage to be correlated with abilities for each person, but I want to do so using a graph, what graph would you recommend me to use and why? When you have one regressor it is obvious, but here how to decide what variables to plot?</p>

<p>Since I am using stata I would appreciate if you could help me with an example of the code for the graph.</p>

<econometrics><applied-econometrics><stata>
What type of graph can be hepful to explain the type of errors that should be used?
Carlos N
# What type of graph can be hepful to explain the type of errors that should be used?

(Asked by: username_0 on 2018-05-02)

I have a regression of wage on several variables, such as education, marriage and so on. I want to explain that it would be a better idea to use cluster errors, since we expect the wage to be correlated with abilities for each person, but I want to do so using a graph, what graph would you recommend me to use and why? When you have one regressor it is obvious, but here how to decide what variables to plot?

Since I am using stata I would appreciate if you could help me with an example of the code for the graph.

**Tags:** econometrics, applied-econometrics, stata


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## 1 answers

### Answer by username_1 on 2018-05-02. Score: 1 | Accepted answer

You are saying: $y$ is regressed on $x\_1$ and $x\_2$, say, and you think it would be better to use *cluster errors* since you expect $y$ is correlated with abilities for each person.

First, $y$ is naturally correlated with the error term $u$ (if you mean the error term by "abilities") because $u$ is a part of $y$. You have no problems with that; $y$ is always strongly correlated with $u$. It also has nothing to do with *cluster errors*.

If you happen to mean *cluster standard errors (SE)* by "cluster errors", and if you are saying that you would use cluster SE because $x\_1$ is correlated with $u$, I would say that the regressor-error correlation (endogeneity) has nothing to do with cluster SE, what so ever. Cluster SE provides valid inference when the the error term show within-cluster (auto)correlation.

Please enlighten me if I misinterpreted your question.


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