Correlated non-classical measurement errors, ‘Second best’ policy inference, and the inverse size-productivity relationship in agriculture

We show that non-classical measurement errors (NCME) on both sides of a regression can bias the parameter estimate of interest in either direction. Furthermore, if these NCME are correlated, correcting for either one alone can aggravate bias relative to ignoring mismeasurement in both variables, a ‘second best’ result with implications for a broad class of economic phenomena of policy interest. We then use a unique Ethiopian dataset of matched...