Why do you use only some of the variation of your treatment variable (the component predicted in the first stage) when using an instrumental variable approach?
A) To get smaller standard errors.
B) To avoid the heteroscedasticity problem.
C) To have the estimate of the treatment effect be based only on variation that is exogenous variation to the other factors affecting the outcome.
D) To have the estimate of the treatment effect be based only on variation of the treatment that is correlated with the outcome.

Question

Quizplus · Accepted Answer

The Answer is C

Why Do You Use Only Some of the Variation of Your