The second stage in two-sage least squares estimation of a simultaneous system would be to
A) Estimate the reduced form equations
B) Replace the endogenous variables that are on the RHS of the structural equations with their reduced form fitted values
C) Replace all endogenous variables in the structural equations with their reduced form fitted values
D) Use the fitted values of the endogenous variables from the reduced forms as additional variables in the structural equations.

Question

Quizplus · Accepted Answer

In the second stage of two-stage least squares (2SLS) estimation, the endogenous variables on the right-hand side (RHS) of the structural equations are replaced with their reduced form fitted values obtained from the first stage. This approach helps to address the issue of endogeneity in the structural equation.

The Second Stage in Two-Sage Least Squares Estimation of a Simultaneous