Linear Model IV Estimation When Instruments Are Many or Weak

Abstract

AbstractEconomists rely frequently on instrumental variables estimation to overcome biases that endogenous explanatory variables cause in ordinary least squares estimation. However, traditional instrumental variables estimators, such as two-stage least squares and limited information maximum likelihood estimation, can suffer persistent estimator biases and size-of-test biases in even very large samples if the instruments used are large in number or are only weakly correlated with an endogenous explanatory variable. This paper reviews strategies for grappling with weak instruments and with large numbers of instruments in linear regression models.