A Cautionary Note On the Use of Two-Stage Least Squares

Abstract

A computational error in the application of multiple regression computer programs to two-stage least squares estimation of the standardized coefficients for nonrecursive models leads to the understatement of the relative size of reciprocal effects. Furthermore, an error in the computation of the disturbance variance invalidates significance tests for the metric coefficients. The sources of the errors are derived and an example is presented. The example reveals that not only do the incorrectly computed standardized coefficients underestimate reciprocal effects, they also may lead to specious conclusions regarding group differences in the relative impact of causal variables.