Question: Take the linear model Y X0e with E[e j X] 0 where X and are 11. (a) Show that E[Xe] 0

Take the linear model Y Æ X0¯Åe with E[e j X] Æ 0 where X and ¯ are 1£1.

(a) Show that E[Xe] Æ 0 and E

£

X2e

¤

Æ 0. Is Z Æ (X X2)0 a valid instrument for estimation of ¯?

(b) Define the 2SLS estimator of ¯ using Z as an instrument for X. How does this differ fromOLS?

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