If you conduct your estimation using two-stage least squares by separately estimating each regression (say in Excel), what condition should you be aware of when interpreting your second stage results?
A) The coefficients will be too low.
B) The coefficients will be too high.
C) The standard errors reported in the second stage are not accurate.
D) The residuals do not sum to zero as they due in the first stage.

Question

Quizplus · Accepted Answer

The standard errors reported in the second stage of a two-stage least squares estimation are not accurate because the procedure does not account for the fact that the fitted values used as regressors in the second stage are estimated, not observed, quantities. This can lead to underestimation of the true standard errors.

If You Conduct Your Estimation Using Two-Stage Least Squares by Separately