Which of the following assumptions is required for two-stage least squares estimation method?
A)There are perfect linear relationships among the instrumental variables.
B)There is strong correlation between each instrumental variable and the error term.
C)The conditional variance of the error term depends on an exogenous explanatory variable.
D)The error term has zero mean.

Question

Quizplus · Accepted Answer

The two-stage least squares estimation method assumes that the error term has zero mean, ensuring that the instruments are uncorrelated with the error term, which is crucial for obtaining unbiased estimators.

Which of the Following Assumptions Is Required for Two-Stage Least