Question: Take the model Y X0 e with E[Ze] 0 and consider the two-stage least squares estimator. The first-stage estimate is least squares

Take the model Y Æ X0¯ Å e with E[Ze] Æ 0 and consider the two-stage least squares estimator. The first-stage estimate is least squares of X on Z with least squares fitted values bX. The second-stage is least squares of Y on bX with coefficient estimator b¯ and least squares residuals bei Æ

Yi ¡ bXi b¯. Consider b¾

2 Æ

1 n

Pni

Æ1 be2 i as an estimator for ¾2 Æ E

e2 i

. Is this appropriate? If not, propose an alternative estimator.

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