Department of Economics | Universitas Padjadjaran

INSTRUMENTAL
VARIABLES

Microeconometrics team
Department of Economics | Universitas Padjadjaran
Department of Economics | Universitas Padjadjaran
 Department of Economics | Universitas Padjadjaran

Masalah Endogenitas
• Endogeneity

Situasi ketika terdapat satu atau lebih variable

independen yang bersifat endogen dalam satu
persamaan
• Endogenous explanatory variable

variable independen yang berkorelasi dengan error

term
 Department of Economics | Universitas Padjadjaran

The Risk of Endogeneity

• Menghasilkan estimasi yang bias

• Menghasilkan estimasi yang tidak konsisten

 Department of Economics | Universitas Padjadjaran

In general
Suppose our model is

𝑦𝑖 = 𝛽0 + 𝛽1 𝑥1𝑖 + 𝛽2 𝑥2𝑖 + 𝑒𝑖

If 𝑥2𝑖 is correlated with 𝑒𝑖 ,

or that 𝐶𝑜𝑣(𝑥2𝑖 , 𝑒𝑖 ) ≠ 0,
we say that 𝑥2𝑖 is an endogenous explanatory variable
 Department of Economics | Universitas Padjadjaran

IV 2SLS
• Why use 2SLS ?
• To anticipate (and solve) whether the instrumental variabel have
any correlations with another explanatory variables.
• To solve simultaneously equation model
 Department of Economics | Universitas Padjadjaran

Exercise C2
The data in tute3a.dta include, for women in Botswana during 1988, information on
number of children, years of education, age, and religious and economic status variables.
 Department of Economics | Universitas Padjadjaran

Exercise C9
The purpose of this exercise is to compare the estimates and standard errors obtained by
correctly using 2SLS with those obtained using inappropriate procedures. Use the data file
tute3b.dta