Two-stage least squares can be used to
A)account for the time-invariant component of the error term.
B)control for heteroskedasticity.
C)control for measurement error in a dependent variable.
D)control for the endogeneity of independent variable.

Question

Quizplus · Accepted Answer

Two-stage least squares is commonly used to control for the endogeneity of independent variables, specifically when there is a correlation between the independent variable and the error term. By using instrumental variables in the first stage of regression, the endogeneity is controlled for and unbiased estimates can be obtained. Options A, B, and C are not the primary uses of two-stage least squares.

Two-Stage Least Squares Can Be Used to