Definition of Measurement Error: The data used in an econometric problem may have been measured with some error, and if so this violates a basic condition of the abstract environment in which OLS is validly derived. This turns out not to be seriously problematic if the dependent variable is affected by an iid mean-zero measurement error, but if the regressors have been measured with a mean-zero iid error the estimates can be biased. There are standard approaches to this problem, notably the use of instrumental variables.

Paraphrasing from Schennach, 2000, p 1: In a linear econometric specification, a measurement error on the regressors can be viewed as a particular type of endogeneity problem causing the disturbance to be correlated with the regressors, which is precisely the problem addressed by standard IV techniques. (Econterms)

Terms related to Measurement Error:

• OLS
• Instrumental Variables
• iid