What Is an Endogenous Variable?

Studies in business often use statistical models that attempt to link relationships between one or more variables. Statistical models usually include at least one independent variable and at lest one dependent variable. In economic modeling, or econometrics, an endogenous variable is common in causal models, where its value comes from other variables in the study. The variables can help determine what particular factors actually create an effect on the endogenous variable. This variable is typically dependent in most causal models for statistical purposes.

A common economic model that explains the dependency of an endogenous variable is supply and demand. Supply and demand work in tandem in market economies because one of the items often moves or changes based on the other. For example, low supply can create high prices when demand for the goods is high. This occurs because consumers have a high need for a given product, whatever it may be. Therefore, the endogenous variable exists in this model as price moves up or down based on supply and demand.

Price is a common variable economists look at in statistical studies. Other statistical models can look at other variables that may or may not be endogenous. Other examples may be production output or employee compensation, for example. Academic studies are most often the reports that include studies on one or more variables, whether independent or dependent. Researchers are often able to define which variables they include in a study by asking a proper research question.

An endogenous variable may not be fully endogenous in some studies. A partial relationship is possible, with the relationship being either positive or negative in nature. The study can help define the relationship fully, which is often the point of the study in the first place. For example, product quality may be influenced by raw materials and labor, among other potential variables. A researcher could then conclude that product quality is a partially endogenous variable in this study.

All studies have different factors that affect the variables included in the research. Factors in the study can be labeled endogenous variables according to the researcher. It may not be possible to make this association, however, until a large part of the research is over. When writing the conclusion, the researcher must define the relationships between the variables and which ones are endogenous or not. In some cases, a researcher may decide that more study is necessary to further define variables and the relationships between them.