The sampling variance for the instrumental variables (IV) estimator is larger than the variance for the ordinary least square estimators (OLS) because _____. A)R² 1 B)R²

Question

The sampling variance for the instrumental variables (IV) estimator is larger than the variance for the ordinary least square estimators (OLS) because _____. A)R² > 1 B)R² < 0 C)R² = 1 D)R² < 1

Quizplus · Accepted Answer

The sampling variance for the IV estimator is larger than the variance of OLS because the ratio of the variance of the instrumental variable to the variance of the endogenous variable (R²) is less than 1. This means that the correlation between the endogenous variable and the instrument is weak, leading to a larger variance in the estimates. Therefore, option D is the best choice.

The Sampling Variance for the Instrumental Variables (IV) Estimator Is