If the instruments are not exogenous,
A)you cannot perform the first stage of TSLS.
B)then, in order to conduct proper inference, it is essential that you use heteroskedasticity-robust standard errors.
C)your model becomes overidentified.
D)then TSLS is inconsistent.

Question

Quizplus · Accepted Answer

If the instruments are not exogenous, meaning they are correlated with the error term in the structural equation, then Two-Stage Least Squares (TSLS) estimates will be inconsistent. This inconsistency arises because the instrumental variables fail to satisfy the necessary condition of instrument exogeneity, which is crucial for the TSLS method to produce unbiased and consistent estimators.

If the Instruments Are Not Exogenous