Which of the following is true about weak instruments?
A) A weak instrument is correlated with the error term.
B) The larger the sample size, the bigger the problem (bias) caused by the use of a weak instrument.
C) A weak instrument is an instrument that does a poor job of explaining X.
D) A weak instrument fails the exclusion condition.

Question

Quizplus · Accepted Answer

A weak instrument is an instrument that does a poor job of explaining X. Option A is incorrect because a strong instrument is correlated with the error term while a weak instrument is uncorrelated. Option B is incorrect because increasing the sample size can reduce the bias caused by weak instruments. Option D is incorrect because the exclusion restriction is not violated by weak instruments, but instead, it is violated by strong instruments.

Which of the Following Is True About Weak Instruments