The variance of 2SLS Bj will be lower if:
A) If we have a weak instrument
B) If we have a worse fit at the first stage of the regression
C) If the instrument has a high explanatory power for X
D) If we have a smaller sample size

Question

Quizplus · Accepted Answer

The variance of 2SLS Bj is decreasing in instrumental variable relevance, which is measured by the strength of the first stage. The instrument should have a high explanatory power for X to increase the precision of the estimated coefficients. Therefore, choice C is the best answer.

The Variance of 2SLS Bj Will Be Lower If