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if the double arrows show that X and the error term are correlated, but that neither variable affects Y, is endogeneity a problem in this scenario? Why or why not?

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  • $\begingroup$ Google the formula for omitted variable bias. $\endgroup$
    – dimitriy
    Commented Feb 8, 2018 at 23:33
  • $\begingroup$ Is that figure a formal DAG? $\endgroup$ Commented Feb 16, 2018 at 6:55

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Endogeneity is a problem when you have a regression model

$$y=X\beta+\epsilon$$

and

$$E(\epsilon | X) \neq 0$$

But if you assume that neither $X$ nor $\epsilon$ affects $y$ then the above model is mis-specified. In other words, $y$ is not a function of $X$ or $\epsilon$ but rather of something else. So there is no point in discussing $X$ or $\epsilon$ when talking about $y$.

Endogeneity can only be discussed conditional on the above relationship ($y=X\beta+\epsilon$) being true. Otherwise (for example, if $y=W\gamma+\nu$), then you need to discuss endogeneity in terms of $W$ and $\nu$.

When you say a variable is endogenous, you need to specify "endogeneous with respect to what other variable?". I in case of $y=W\gamma+\nu$, if $E(\nu|W)\neq0$, i.e. $W$ is endogenous, then $W$ is endogenous with respect to $y$.

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