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Are Nearly “Exogenous Instruments” Reliable?

Author

Listed:
  • Daniel Berkowitz
  • Mehmet Caner*
  • Ying Fang

Abstract

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.

Suggested Citation

  • Daniel Berkowitz & Mehmet Caner* & Ying Fang, 2013. "Are Nearly “Exogenous Instruments” Reliable?," Working Papers 2013-10-14, Wang Yanan Institute for Studies in Economics (WISE), Xiamen University.
    • Handle: RePEc:wyi:wpaper:001987
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    JEL classification:

    • C30 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - General

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