CPR Working Paper Series No. 116
A Note on the
Application of EC2SLS and EC3SLS Estimators in
Panel Data
Models
Badi H. Baltagi and Long Liu
July 2009
Abstract:
Baltagi and Li (1992) showed that for estimating a single equation in a
simultaneous panel data model, EC2SLS has more instruments than G2SLS. Although
these extra instruments are redundant in White (1986) terminology, they may
yield different estimates and standard errors in empirical studies with finite N
and T. We illustrate this using the crime data of Cornwell and Trumbull (1994).
We show that the standard errors of EC2SLS are smaller than those of G2SLS for
this example. In general, we prove that the asymptotic variance of G2SLS differs
from that of EC2SLS by a positive semi-definite matrix. Although this difference
tends to zero as the sample size tends to infinity, in small samples, this
difference may be different from zero and can lead to gains in small sample
efficiency. This proof is extended to the system equations 3SLS counterparts.
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