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A microfinance institution (MFI) currently operates in about 50 villages in Uganda, and wants to learn more about the impact of their microfinance loans on

A microfinance institution (MFI) currently operates in about 50 villages in Uganda, and wants to learn more about the impact of their microfinance loans on small business owners. Specifically, the MFI is interested in learning whether having a loan allows a business to expand their operations, increase sales, and earn more revenue. The MFI has conducted a survey of 250 business owners across the 50 villages where it operates. Some of these business owners have a microfinance loan and some don't. The results of this survey includes whether the business owner currently has a microfinance loan (LOANi) and the value of business revenues over the past month (REV ENUEi).

The MFI asks you to run the following short regression:

REV ENUEi=0+1LOANi+i

  1. Explain why1would be a biased estimate of the true impact of loans on business revenues. Using only your intuition, would you expect1to be an overestimate or an underestimate of the true impact of the causal impact of microfinance loans on revenues, and why?

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