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Dealing with endogenous independent variables (Car Industry Project)? Watch

    • Thread Starter

    I am running a regression on vehicle demand (vehicle registrations in 2011) with the following independent variables:
    Assembly location
    Alloy wheels*
    Number of seats
    Number of doors
    Driven wheels (front, rear or 4x4)
    Maximum speed
    Fuel type*
    Fuel capacity
    CO2 emissions
    Vehicle tax
    Insurance group
    Customer ratings
    Air conditioning*
    Adult safety
    Child safety
    Cruise control*
    Climate control*
    Rear parking sensor*
    Central locking*
    Leather interior*

    *= Dummy variables

    The paper is looking at consumer preferences, in particular how they consider the origin of the vehicles they're looking to buy. Do consumers want a domestically produced car or do they not care?

    I have a few queries and guidance with any of them would be more than appreciated as I am really struggling- despite hours of research. (I have taken only one econometrics course whilst at University and so, have very little knowledge on such matters)

    1. As price is endogenous, how do I control for this? I was given a little pointer and told to run a separate regression with the remaining independent variables and price as the dependent variable but I wasn't sure how this would help? I know that given there is more than one endogenous variable, it is often preferred to tackle the causal questions separately. Have also looked into running a two-stage least-squares regression whereby lagged price is used to calculate a proxy for price that is uncorrelated with the measurement errors of demand (registrations). This proxy could then be substituted for the original price variable and estimated again?

    2. Customer review scores are also endogenous so I'm not sure how to control for this? Again, received a little pointer from a friend who mentioned something about reduced form regressions to run a review score model but I'm not sure what I'd do next?

    Once again, ANY help on this would really be appreciated.
    (I've read so many papers but given my lack of knowledge on the subject, I'm finding it quite difficult to work my way round what they're saying so figured this could help!)

    On a lighter note- was thinking of titling the paper something along the lines of:
    Consumer Perceptions: Does the provenance of vehicles affect an individual's purchasing journey.Again, clutching at straws here and it probably isn't funny in the slightest (I doubt the pun is even noticeable). Should I steer clear of such titles? (Haha, another pun!!)
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