Estimation with weak instruments: Accuracy of higher-order bias and MSE approximations
In this paper, we consider parameter estimation in a linear simultaneous equations model. It is well known that two-stage least squares (2SLS) estimators may perform poorly when the instruments are weak. In this case 2SLS tends to suffer from the substantial small sample biases. It is also known that LIML and Nagar-type estimators are less biased than 2SLS but suffer from large small sample variability. We construct a bias-corrected version of 2SLS based on the Jackknife principle. Using higher-order expansions we show that the MSE of our Jackknife 2SLS estimator is approximately the same as the MSE of the Nagar-type estimator. We also compare the Jackknife 2SLS with an estimator suggested by Fuller (Econometrica 45, 933--54) that significantly decreases the small sample variability of LIML. Monte Carlo simulations show that even in relatively large samples the MSE of LIML and Nagar can be substantially larger than for Jackknife 2SLS. The Jackknife 2SLS estimator and Fuller's estimator give the best overall performance. Based on our Monte Carlo experiments we conduct informal statistical tests of the accuracy of approximate bias and MSE formulas. We find that higher-order expansions traditionally used to rank LIML, 2SLS and other IV estimators are unreliable when identification of the model is weak. Overall, our results show that only estimators with well-defined finite sample moments should be used when identification of the model is weak. Copyright Royal Economic Socciety 2004
If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Volume (Year): 7 (2004)
Issue (Month): 1 (06)
|Contact details of provider:|| Postal: Office of the Secretary-General, Rm E35, The Bute Building, Westburn Lane, St Andrews, KY16 9TS, UK|
Phone: +44 1334 462479
Web page: http://www.res.org.uk/
More information through EDIRC
|Order Information:||Web: http://www.ectj.org|
When requesting a correction, please mention this item's handle: RePEc:ect:emjrnl:v:7:y:2004:i:1:p:272-306. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Wiley-Blackwell Digital Licensing)or (Christopher F. Baum)
If references are entirely missing, you can add them using this form.