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Unformatted text preview: We assumed that the error is additively separable in the second stage What if we are wrong? Example from Hahn and Ridder y = x 2 u x = z + v u = : 5 v + p 3 2 e each error ( u; v; e ) are iid N (0 ; 1) Average structural function & ( x ) = E u ( y j x ) = 0 yet 2SLS will estimate ^ = 0 and ^ 1 = 1 Resolve Issue could work with logs (restore separability) Hahn also shows that if we estimate conditional median, no problem arises if u is scalar therefore, if u is symmetric and scalar, then this issue does not arise...
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 Fall '08
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