Instrumental variables estimation using heteroskedasticity-based instruments
In a 2012 article in the Journal of Business & Economic Statistics, Arthur Lewbel presents the theory of allowing the identification and estimation of "mismeasured and endogenous regressor models" by exploiting heteroskedasticity. These models include linear regression models customarily estimated with instrumental variables (IV) or IV-GMM techniques. Lewbel's method, under suitable conditions, can provide instruments where no conventional instruments are available or augment standard instruments to enable tests of overidentification in the context of an exactly identified model. In this talk, I discuss the rationale for Lewbel's methodology and illustrate its implementation in a variant of Baum, Schaffer, and Stillman's ivreg2 routine, ivreg2h.