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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
mariaelena.bontempi@unibo.it
Irene Mammi
Department of Economics
University of Bologna
Bologna, Italy
irene.mammi@unibo.it
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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