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Instrumental variables estimation with flexible distribution

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Author Info
Christian Hansen (Institute for Fiscal Studies and Chicago GSB)
James B. McDonald
Whitney Newey () (Institute for Fiscal Studies and Massachusetts Institute of Technology)

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Abstract

Instrumental variables are often associated with low estimator precision. This paper explores efficiency gains which might be achievable using moment conditions which are nonlinear in the disturbances and are based on flexible parametric families for error distributions. We show that these estimators can achieve the semiparametric efficiency bound when the true error distribution is a member of the parametric family. Monte Carlo simulations demonstrate low efficiency loss in the case of normal error distributions and potentially significant efficiency improvements in the case of thick-tailed and/or skewed error distributions.

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File URL: http://cemmap.ifs.org.uk/wps/cwp2107.pdf
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Publisher Info
Paper provided by Centre for Microdata Methods and Practice, Institute for Fiscal Studies in its series CeMMAP working papers with number CWP21/07.

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Date of creation: Aug 2007
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Handle: RePEc:ifs:cemmap:21/07

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