The reduced form equation for X
A)regresses the endogenous variable X on the smallest possible subset of regressors.
B)relates the endogenous variable X to all the available exogenous variables, both those included in the regression of interest and the instruments.
C)uses the predicted values of X from the first stage as a regressor in the original equation.
D)uses smaller standard errors, such as homoskedasticity-only standard errors, for inference.

Question

Quizplus · Accepted Answer

The reduced form equation for an endogenous variable X involves regressing X on all available exogenous variables, including both those directly included in the model of interest and any additional instruments used for identification purposes. This approach helps in isolating the variation in X that is purely due to exogenous factors, which is crucial for addressing issues of endogeneity in econometric analyses.

The Reduced Form Equation for X