Instrumental Variables

Instrumental variable procedures are needed when some regressors are endogenous (correlated with the error term). The procedure for correcting this endogeneity problem involves finding instruments that are correlated with the endogenous regressors but uncorrelated with the error term. Then the two stage least squares procedure can be applied. An example of instrumental variables is when wages and education jointly depend on ability which is not directly observable, but we can use available test scores to proxy for ability.

Handouts, Programs, and Data

Instrumental Variables Example

Instrumental Variables Stata Program and Output

Instrumental Variables in Stata.do

iv_health.dta

Instrumental Variables R Program and Output

Instrumental Variables in R.R

iv_health.csv

Instrumental Variables SAS Program and Output

Instrumental Variables in SAS.sas

iv_health.csv

Instrumental variables: topics covered

- The two stage least squares (2SLS) estimation procedure
- Identification issues
- Endogeneity tests
- Weak instrumental variables
- Systems of equations (2SLS and 3SLS)