Pca2: Implementing a Strategy to Reduce the Instrument Count in Panel GMM

Quaderni - Working Paper DSE N° 960

25 Pages Posted: 2 Sep 2014

See all articles by Maria Elena Bontempi

Maria Elena Bontempi

University of Bologna - Department of Economics

Irene Mammi

Ca' Foscari University of Venice

Date Written: August 27, 2014

Abstract

The problem of instrument proliferation and its consequences (overfitting of the endogenous explanatory variables, biased IV and GMM estimators, weakening of the power of the overidentification tests) are well known. This paper introduces a statistical method to reduce the instrument count. The principal component analysis (PCA) is applied on the instrument matrix, and the PCA scores are used as instruments for the panel generalized method-of-moments (GMM) estimation. This strategy is implemented through the new command pca2.

Keywords: pca2, proliferation of instruments, principal component analysis, panel data, generalized method of moments

JEL Classification: C13, C15, C33, C36, C63

Suggested Citation

Bontempi, Maria Elena and Mammi, Irene, Pca2: Implementing a Strategy to Reduce the Instrument Count in Panel GMM (August 27, 2014). Quaderni - Working Paper DSE N° 960, Available at SSRN: https://ssrn.com/abstract=2490345 or http://dx.doi.org/10.2139/ssrn.2490345

Maria Elena Bontempi (Contact Author)

University of Bologna - Department of Economics ( email )

Strada Maggiore, 45
40125 Bologna, 40125
Italy
+39 051 2092600 (Phone)
+39 051 2092664 (Fax)

Irene Mammi

Ca' Foscari University of Venice ( email )

Dorsoduro 3246
Venice, Veneto 30123
Italy

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