What are the implications for 2SLS estimators if reduced form parameter estimates are statistically insignificant?
A)still consistent in large samples,but no longer BLUE
B)there will be correlation in the structural equations,causing estimators to be inconsistent
C)there are no consequences,only structural parameters matter
D)small sample properties no longer hold,but asymptotic properties still apply

Question

Quizplus · Accepted Answer

If the reduced form parameter estimates are statistically insignificant, it means that the instruments are weak and not strongly related to the endogenous variable. As a result, there will be correlation in the structural equations, which will cause the 2SLS estimators to be inconsistent. Therefore, option B is the correct answer. Option A is not entirely correct because 2SLS estimators will no longer be consistent in small samples if reduced form parameter estimates are not statistically significant. Option C is incorrect because the structural parameters are estimated using the 2SLS estimators, which are affected by the weakness of the instruments. Finally, option D is incorrect because small sample properties are not the only issue, as even asymptotic properties will not hold if the instruments are weak.

What Are the Implications for 2SLS Estimators If Reduced Form