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Weak Instrumental Variables: Limitations of Traditional 2SLS and Exploring Alternative Instrumental Variable Estimators

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  • Aiwei Huang
  • Madhurima Chandra
  • Laura Malkhasyan

Abstract

Instrumental variables estimation has gained considerable traction in recent decades as a tool for causal inference, particularly amongst empirical researchers. This paper makes three contributions. First, we provide a detailed theoretical discussion on the properties of the standard two-stage least squares estimator in the presence of weak instruments and introduce and derive two alternative estimators. Second, we conduct Monte-Carlo simulations to compare the finite-sample behavior of the different estimators, particularly in the weak-instruments case. Third, we apply the estimators to a real-world context; we employ the different estimators to calculate returns to schooling.

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  • Aiwei Huang & Madhurima Chandra & Laura Malkhasyan, 2021. "Weak Instrumental Variables: Limitations of Traditional 2SLS and Exploring Alternative Instrumental Variable Estimators," Papers 2104.12370, arXiv.org.
    • Handle: RePEc:arx:papers:2104.12370
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    References listed on IDEAS

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