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The Stata Journal
Volume 15 Number 4: pp. 1075-1097

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Implementing a strategy to reduce the instrument count in panel GMM

Maria Elena Bontempi
Department of Economics
University of Bologna
Bologna, Italy
Irene Mammi
Department of Economics
University of Bologna
Bologna, Italy
Abstract.  The problem of instrument proliferation and its consequences—overfitting of the endogenous explanatory variables, biased instrumental-variables and generalized method of moments estimators, and weakening of the power of the overidentification tests—are well known. This article introduces a statistical method to reduce the instrument count. Principal component analysis is applied on the instrument matrix, and the principal-component analysis scores are used as instruments for the panel generalized method of moments estimation. This strategy is implemented through the new command pca2.
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View all articles with these keywords: pca2, proliferation of instruments, principal component analysis, panel data, generalized method of moments

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