Consider the regression model y_i = \beta_1 + \beta_2 x_{2i} + e_i where x_{2i} is endogenous. Two potential instruments, z_{1i} and z_{2i} are available. Open this data set in Gretl and estimate the model using 2SLS with both instruments.
(a) Enter the sum of squared errors (SSE) of the 2SLS regression in the box below (rounded to 3 decimal places).
Conduct a Sargan test for instrument validity.
To get full marks for this question you will need to estimate the appropriate auxiliary regression equation and construct the test statistic ‘manually’.
(b) In the box below, enter the estimate of the intercept term in the auxiliary regression (rounded to 3 decimal places).