What is the primary problem associated with using "weak instruments" (instruments that have low correlation with the endogenous variable) in IV/2SLS estimation?

Question

BlackTom AI · Accepted Answer

Here is the question and all answer options restated clearly for analysis:
Question: What is the primary problem associated with using "weak instruments" (instruments that have low correlation with the endogenous variable) in IV/2SLS estimation?
Answer options:
1) IV/2SLS requires using robust standard errors, which OLS does not.
2) IV/2SLS estimates become inconsistent even in large samples.
3) IV/2SLS estimates can be severely biased in finite samples, and standard errors/inference become unreliable.
4) IV/2SLS estimates remain unbiased but become very inefficient.

Option 1: IV/2SLS requires using robust standard errors, which OLS does not.
- Why this is not accurate: The need for robust standard errors is not the core problem caused by weak instruments. Weak instruments primarily affect bias and inference, not solely the necessity of robust standard errors in the general sense. This statement misidentifies the fundamental issue, confusing inference methods with the existence of weak instruments.

Option 2: IV/2SLS estimates become inconsistent even in large samples.
- Why this is not correct: In large samples, IV/2SLS estimates are asymptotically consistent even with weak instruments, provided some conditions hold (though efficiency and finite-sample bias may be problematic). The claim of inconsistency in large samples overstates the problem and ignores the standard asymptotic results. The primary concern is more about finite-sample bias and weak-instrument-robust inference, not asymptotic inconsistency.

Option 3: IV/2SLS estimates can be severely biased in finite samples, and standard errors/inference become unreliable.
- Why this is correct: This captures the central issue with weak instruments. When instruments barely explain the endogenous variation, the 2SLS estimator can be biased and its sampling distribution can be distorted in finite samples, leading to unreliable standard errors and hypothesis tests. Hence inference is severely distorted in finite samples with weak instruments, even though consistency holds asymptotically under certain conditions.

Option 4: IV/2SLS estimates remain unbiased but become very inefficient.
- Why this is not accurate: The claim that estimates remain unbiased under weak instruments is not generally true in finite samples; bias can be substantial. Moreover, while efficiency can deteriorate due to weak instruments compared to using strong instruments, the core, well-documented problem is not simply inefficiency but finite-sample bias and unreliable inference. This statement misses the key finite-sample bias concern and overstates the benign nature of the bias.

In summary, the strongest and most precise characterization of the primary problem with weak instruments in IV/2SLS is that finite-sample bias can be substantial and inference based on standard errors can be unreliable. The other options do not accurately reflect the established issues with weak instruments.

What is the primary problem associated with using "weak instruments" (instruments that have low correlation with the endogenous variable) in IV/2SLS estimation?

查看解析

登录即可查看完整答案

类似问题

This question refers to the data "binoculars_midterm.csv". What is the partial F-statistic (for the first stage regression/ weak instrument test) if you carry out instrumental variable estimation that relies on the strongest, valid instrument(s) possible for your data?

Question6 For IV estimation, which condition ensures instrument relevance? Select one alternative: a) [math] b) [math] c) [math] d) [math] ResetMaximum marks: 0.5 Flag question undefined

Under what condition can the Sargan or Basmann test for overidentifying restrictions be performed in an IV/2SLS context?

In the Two-Stage Least Squares (2SLS) estimation procedure, what is the purpose of the first stage regression?

What does the "relevance" condition for a valid instrumental variable 𝑧 (used for an endogenous variable 𝑥 ) require?

What is the primary problem associated with using "weak instruments" (instruments that have low correlation with the endogenous variable) in IV/2SLS estimation?

更多留学生实用工具

考试浏览器助手

风格化写作助手

论文查重助手

文献引用助手

课堂转译助手

课堂笔记助手

Quiz搜索助手

学校历年真题

智能刷题助手

智能匹配练习

希望你的学习变得更简单