Suppose you are trying to estimate the following regression: Y_i = β₀ + β₁X₁_i + β₂X₂_i + β₃X₃_i + U_i, with an instrument for Z_i for X₂_i. All of the following variables will be included (on the right- and left-hand side of this regression) in the second stage of two-stage least squares except for which one? A) X₁_i B) X₂_i C) X₃_i D) Y_i

Question

Quizplus · Accepted Answer

In the second stage of two-stage least squares (2SLS), the instrumented variable (in this case, $X_{2i}$) is replaced by its predicted values from the first stage. Therefore, the original variable $X_{2i}$ will not be included directly in the second stage regression; instead, its predicted values from the first stage are used.

Suppose You Are Trying to Estimate the Following Regression: Yi

Suppose You Are Trying to Estimate the Following Regression: Y_i