Week 7 - Regression Diagnosis (II): Endogeneity

Question 1

external vs internal validity

Answer 1

External validity: Inferences generated in your model can be
extended from your population and settings of study to other
populations with different settings.
2 Internal validity: Causal claims inferred from your model are truly
valid for the population under study.

Question 2

Threats to internal validity

Answer 2

Question 3

Endogeneity

Answer 3

Question 4

When do you observed omitted variable bias?

Answer 4

Question 5

OVB Problem 1

Answer 5

Question 6

OVB Problem 2

Answer 6

Question 7

Summary of direction of bias in ommited variable equation.

Answer 7

Question 8

When do you need to use Instrumental Variable?

Answer 8

Question 9

IV with a single regressor and a single instrument

Answer 9

Question 10

Getting the right terminology

Answer 10

An endogenous variable is one that is correlated with uˆ.
2 An exogenous variable is one that is uncorrelated with uˆ.

Question 11

Conditions for a valid instrument

Answer 11

Question 12

Estimation: 2SLS Stage 1

Answer 12

Question 13

Estimation: 2SLS Stage 2

Answer 13

Question 14

2SLS with a single endogenous regressor a m instruments

Answer 14

Question 15

Checking assumption #1: Instrument relevance

Answer 15

Question 16

The strength of Instruments: The First-stage F-statistics

Answer 16

The first stage regression (one X):

2 Regress X on Z1, .., Zm, W1, . . . , Wk .

3 Totally irrelevant instruments =⇒ all the coefficients on Z1, .., Zm are
zero.

4 The first-stage F-statistic tests the hypothesis that Z1, .., Zm do not
enter the first stage regression.

5 Weak instruments imply a small first stage F-statistic.

Question 17

Where do valid instruments come from?

Answer 17

Method #1
1 Variables in another equation (factors that explain GDP/cap but are
not necessarily relate to Foreign Aid).
2 Method #2
1 Look for exogenous variation (Z) that is “ as if ” randomly assigned
(does not directly affect Y) but affects X.