Question

15. Suppose that the population model is y-βο + Ax + u Another way to deal with endogeneity ofr s to employ the Two-stage Least Squared Estimator. In the first stage, we estimate x = π。+ π12+ u and obtain its prediction x and run the regression y = β° + Ax + u in the second stage. Which of the following is correct regarding therelationship between the 2SLS and IV estimators? (a) The 2SLS estimator is exactly the same as the IV estimator if the number ofinstruments is equal to the number of endogenous vanables (b) The 2SLS estimator is always the same as the IV estimator. (c) The 2SLS estimator is always different from the IV estimator.

Answer 1

1.5

2SLS estimators are IV estimators.

An IV estimator is the sample analog of the form:

Cov(Y, Z) Cor(X, Z)

where Y is the outcome variable, X is the endogenous variable, and Z is the instrumental variable.

It can be shown that the 2SLS is of the above form. The advantage of 2SLS estimators over other IV estimators is that 2SLS can easily combine multiple instrumental variables, and it also makes including control variables easier. Generally 2SLS is referred to as IV estimation for models with more than one instrument and with only one endogenous explanatory variable Y

Correct Ans - B