Minimum distance approach to inference with many instruments

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Abstract

I analyze a linear instrumental variables model with a single endogenous regressor and many instruments. I use invariance arguments to construct a new minimum distance objective function. With respect to a particular weight matrix, the minimum distance estimator is equivalent to the random effects estimator of Chamberlain and Imbens (2004), and the estimator of the coefficient on the endogenous regressor coincides with the limited information maximum likelihood estimator. This weight matrix is inefficient unless the errors are normal, and I construct a new, more efficient estimator based on the optimal weight matrix. Finally, I show that when the minimum distance objective function does not impose a proportionality restriction on the reduced-form coefficients, the resulting estimator corresponds to a version of the bias-corrected two-stage least squares estimator. I use the objective function to construct confidence intervals that remain valid when the proportionality restriction is violated.

Original languageEnglish (US)
Pages (from-to)86-100
Number of pages15
JournalJournal of Econometrics
Volume204
Issue number1
DOIs
StatePublished - May 2018

All Science Journal Classification (ASJC) codes

  • Economics and Econometrics

Keywords

  • Bias-corrected two-stage least squares
  • Incidental parameters
  • Instrumental variables
  • Limited information maximum likelihood
  • Many instruments
  • Minimum distance
  • Misspecification
  • Random effects

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