The hardest part of implementing the instrumental variables approach is:
A) deciding between using two-stage least squares or generalized method of moments.
B) reporting the appropriate standard errors.
C) finding and defending the exogeneity condition of your instrumental variable.
D) determining which of your instrumental variables are relevant.

Question

Quizplus · Accepted Answer

Finding and defending the exogeneity condition of your instrumental variable is the hardest part of implementing the instrumental variables approach. This is because it involves selecting variables that are unrelated to the error term and correlated with the endogenous variable, and defending the assumptions made about their exogeneity to obtain consistent estimates. Deciding between using two-stage least squares or generalized method of moments and determining which instrumental variables are relevant are important steps in the process, but are typically less challenging than establishing the exogeneity condition. Reporting the appropriate standard errors is also important, but is a technical step that can be handled with established procedures.

The Hardest Part of Implementing the Instrumental Variables Approach Is