Which of the following explains why a 2SLS model can be used to analyze randomized experiments with imperfect compliance?
A) The random assignment (Z) is uncorrelated with the independent variable.
B) The random assignment variable (Z) is correlated with the error term in the outcome equation.
C) The random assignment (Z) is correlated with the independent variable but not with the error term in the outcome equation.
D) The random assignment (Z) causes multicollinearity.

Question

Quizplus · Accepted Answer

The 2SLS (Two-Stage Least Squares) model is used in the context of instrumental variables estimation, where the random assignment (Z) serves as an instrument for the independent variable. In randomized experiments with imperfect compliance, not all subjects adhere to their assigned treatment, making direct analysis problematic. The key for an instrument like Z to be valid is that it must be correlated with the independent variable (ensuring it has a causal pathway to affect the dependent variable through the independent variable) but not with the error term in the outcome equation (ensuring that the instrument is not directly related to the outcome except through its effect on the independent variable). This ensures that the instrument induces variation in the independent variable that is exogenous, allowing for consistent estimation of the causal effect of the independent variable on the outcome.

Which of the Following Explains Why a 2SLS Model Can