An Endogeneity-Corrected Bootstrap Test On Instrument Relevance In Instrumental Variables Estimation

Jinook Jeong

Korean Economic Review, 2004, vol. 20, 3-33

Abstract: It is well known that IV estimation produces considerable bias when the instruments are irrelevant. Previous studies have suggested several instrument screening tests to avoid such bias. In this paper, an LR test based on the exact finite sample distribution of R2 is proposed for a more powerful instrument screening test. It is also analyzed how the degree of endogeneity affects bias in IV estimation. Then, a nonparametric instrument screening test with endogeneity adjustment is suggested. The finite sample performance of the new test is evaluated in a Monte Carlo simulation.

Keywords: IV Estimation; Instrument Relevance; Bootstrap; Endogeneity (search for similar items in EconPapers)
JEL-codes: C12 C14 C15 (search for similar items in EconPapers)
Date: 2004
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