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Supposedly Strong Instruments and Good Leverage Points

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  • Darwin Ugarte Ontiveros

    ()
    (Center for Research in the Economics of Development, University of Namur)

  • Vincenzo Verardi

    ()
    (Center for Research in the Economics of Development, University of Namur; European Center for Advanced Research in Economics and Statistics, Universite Libre de Bruxelles)

Abstract

In this paper, we warn on the overoptimistic conclusions led by weak instruments testing when good leverage points are present in the first stage of an IV estimation. Some simulations and an empirical application are provided to illustrate the point raised.

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File URL: http://www.fundp.ac.be/eco/economie/recherche/wpseries/wp/1203.pdf
File Function: First version, 2012
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Bibliographic Info

Paper provided by University of Namur, Department of Economics in its series Working Papers with number 1203.

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Length: 11 pages
Date of creation: Feb 2012
Date of revision:
Handle: RePEc:nam:wpaper:1203

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Keywords: Instrumental variables; Weak instruments; Outliers; Robust statistics;

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  1. McKenzie, David & Seynabou Sakho, Yaye, 2010. "Does it pay firms to register for taxes? The impact of formality on firm profitability," Journal of Development Economics, Elsevier, Elsevier, vol. 91(1), pages 15-24, January.
  2. James H. Stock & Motohiro Yogo, 2002. "Testing for Weak Instruments in Linear IV Regression," NBER Technical Working Papers, National Bureau of Economic Research, Inc 0284, National Bureau of Economic Research, Inc.
  3. Rodolphe Desbordes & Vincenzo Verardi, 2012. "A robust instrumental-variables estimator," Stata Journal, StataCorp LP, StataCorp LP, vol. 12(2), pages 169–181, June.
  4. Kleibergen, Frank & Paap, Richard, 2006. "Generalized reduced rank tests using the singular value decomposition," Journal of Econometrics, Elsevier, Elsevier, vol. 133(1), pages 97-126, July.
  5. Donald W.K. Andrews & James H. Stock, 2005. "Inference with Weak Instruments," NBER Technical Working Papers, National Bureau of Economic Research, Inc 0313, National Bureau of Economic Research, Inc.
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