Problem #1

Discuss where valid instruments come from. Part of your explorations must deal withchecking the validity of instruments and what the consequences of weak instruments are.

Problem #2

Discuss the Overidentifying Restrictions Test. What is meant exactly by ”overidentifi-cation?” State the null hypothesis. Describe how to calculate the J-statistic and whatits distribution is. Use an example of two instruments and one endogenous variable toexplain under what situation the test will be likely to reject the null hypothesis. Whatdoes this example tell you about the exactly identified case? If your variables pass thetest, is this sufficient for these variables to be good instruments?

Valid InstrumentsValid instruments are decides by specialists in a given field. A valid instrument used to assess theintelligence of High School Goers is devised by a specialist with vast…