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QUESTION
A model with single endogenous regressor call be written as ! 4 = 10 tart , E( zu) _ O Elouj = O. Assume that there exists an instrument...
To solve this problem. It requires using the Two Stage Least Square method.
2. A model with single endogenous regressor call be written as !4 = 10 tart ", E( zu) _ O Elouj = O.Assume that there exists an instrument variable*= such that & is uncorrelatedwith " and highly correlated with I . Consider the following two-step method .intended to mimic 25 1.5 :( a) Regress I on , and obtain fitted values , I . ( That is , " is omitted from thefirst - stage regression ) .( b) Regress y on &, and i to obtain & and a .Show that & and a are generally inconsistent . When would & and a beconsistent ! "( 10 points )