The two stage least squares estimator is less efficient than the ordinary least squares estimator when the explanatory variables are exogenous.

Question

Quizplus · Accepted Answer

The two-stage least squares (2SLS) estimator is designed for situations where there are endogenous explanatory variables, using instrumental variables to address the endogeneity. When the explanatory variables are exogenous, the ordinary least squares (OLS) estimator is more efficient (i.e., it has a smaller variance) than the 2SLS estimator, because OLS does not suffer from the inefficiencies introduced by the use of instrumental variables, which are necessary in 2SLS to correct for endogeneity.

The Two Stage Least Squares Estimator Is Less Efficient Than