Endogenous vs. Exogenous Variables: Definition & Examples

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Two variables that can occur in regression models are:

1. Endogenous variables: Variables that are explained by other variables within a model.

2. Exogenous variables: Variables that are not explained by other variables within a model.

When using regression models, researchers are often interested in understanding the relationship between one or more explanatory variables and a response variable.

And in general:

• It’s possible to manipulate endogenous variables to produce some effect in the response variable.
• It’s not possible to manipulate exogenous variables.

The following examples illustrate how to identify endogenous vs. exogenous variables in different regression models.

Example 1: Crop Yield

Suppose a farmer is interested in understanding the factors that affect total crop yield. He collects data and builds the following regression model:

Crop Yield = B₀ + B₁(Fertilizer) + B₂(Type of Soil Used) + B₃(Rainfall)

Here is how to identify each variable in the model:

• Crop Yield: This variable is endogenous because it can be explained by fertilizer, type of soil used, and rainfall.
• Fertilizer: This variable is endogenous because its effectiveness is influenced by the type of soil used.
• Type of Soil Used: This variable is endogenous because it is influenced by the type of soil used.
• Rainfall: This variable is exogenous because it is not influenced by the other variables in the model. In other words, the amount of fertilizer used or the type of soil used cannot effect the amount of rainfall in any way.

Example 2: Consumer Spending

Suppose an economist is interested in understanding the factors that affect consumer spending. She collects data and builds the following regression model:

Consumer Spending = B₀ + B₁(Income) + B₂(Investment Returns) + B₃(Government Tax Rates)

Here is how to identify each variable in the model:

• Consumer Spending: This variable is endogenous because it can be explained by income, investment returns, and government spending.
• Income: This variable is endogenous because it is affected by government tax rates.
• Investment Returns: This variable is endogenous because it is influenced government tax rates.
• Government tax rates: This variable is exogenous because it is not influenced by the other variables in the model. In other words, the amount that an individual earns in income or earns in investment returns cannot effect the tax rates set by the government in any way.

Additional Resources

What is a Moderating Variable?
What is a Confounding Variable?
What is a Manipulated Variable?
What is an Antecedent Variable?