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Are "Nearly Exogenous" Instruments Reliable?

  • Daniel Berkowitz
  • Mehmet Caner
  • Ying Fang

We show that when instruments are nearly exogenous, the two stage least squares t-statistic unpredictably over-rejects or under-rejects the null hypothesis that the endogenous regressor is insignificant and Anderson-Rubin test over-rejects the null. We prove that in the limit these tests are no longer nuisance parameter free.

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File URL: http://www.pitt.edu/~dmberk/bcf_061506.pdf
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Paper provided by University of Pittsburgh, Department of Economics in its series Working Papers with number 219.

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Date of creation: Jan 2006
Date of revision: Jan 2006
Handle: RePEc:pit:wpaper:219
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  15. Angrist, Joshua D, 1990. "Lifetime Earnings and the Vietnam Era Draft Lottery: Evidence from Social Security Administrative Records: Errata," American Economic Review, American Economic Association, vol. 80(5), pages 1284-86, December.
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