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Minimum distance approach to inference with many instruments

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  • Kolesár, Michal

Abstract

I analyze a linear instrumental variables model with a single endogenous regressor and many instruments. I use invariance arguments to construct a new minimum distance objective function. With respect to a particular weight matrix, the minimum distance estimator is equivalent to the random effects estimator of Chamberlain and Imbens (2004), and the estimator of the coefficient on the endogenous regressor coincides with the limited information maximum likelihood estimator. This weight matrix is inefficient unless the errors are normal, and I construct a new, more efficient estimator based on the optimal weight matrix. Finally, I show that when the minimum distance objective function does not impose a proportionality restriction on the reduced-form coefficients, the resulting estimator corresponds to a version of the bias-corrected two-stage least squares estimator. I use the objective function to construct confidence intervals that remain valid when the proportionality restriction is violated.

Suggested Citation

  • Kolesár, Michal, 2018. "Minimum distance approach to inference with many instruments," Journal of Econometrics, Elsevier, vol. 204(1), pages 86-100.
  • Handle: RePEc:eee:econom:v:204:y:2018:i:1:p:86-100
    DOI: 10.1016/j.jeconom.2018.01.004
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    More about this item

    Keywords

    Instrumental variables; Minimum distance; Incidental parameters; Random effects; Many instruments; Misspecification; Limited information maximum likelihood; Bias-corrected two-stage least squares;
    All these keywords.

    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C26 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Instrumental Variables (IV) Estimation
    • C36 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Instrumental Variables (IV) Estimation

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