Implementing a strategy to reduce the instrument count in panel GMM

Maria Bontempi and Irene Mammi

Stata Journal, 2015, vol. 15, issue 4, 1075-1097

Abstract: The problem of instrument proliferation and its consequences— overfitting of the endogenous explanatory variables, biased instrumental-variables and generalized method of moments estimators, and weakening of the power of the overidentification tests—are well known. This article introduces a statistical method to reduce the instrument count. Principal component analysis is applied on the instrument matrix, and the principal-component analysis scores are used as instruments for the panel generalized method of moments estimation. This strategy is implemented through the new command pca2. Copyright 2015 by StataCorp LP.

Keywords: pca2; proliferation of instruments; principal component analysis; panel data; generalized method of moments (search for similar items in EconPapers)
Date: 2015
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