A weak instrument F-test in linear IV models with multiple endogenous variables

We consider testing for weak instruments in a model with multiple endogenous variables. Unlike Stock and Yogo (2005), who considered a weak instruments problem where the rank of the matrix of reduced form parameters is near zero, here we consider a weak instruments problem of a near rank reduction of one in the matrix of reduced form parameters. For example, in a two-variable model, we consider weak instrument asymptotics of the form  π1 = δ pi2 + c / √n where π1 and π2 are the parameters in the two reduced-form equations, c is a vector of constants and n is the sample size. We investigate the use of a conditional first-stage F-statistic along the lines of the proposal by Angrist and Pischke (2009) and show that, unless δ = 0 , the variance in the denominator of their F-statistic needs to be adjusted in order to get a correct asymptotic distribution when testing the hypothesis H0 : π1 = δ&pi2. We show that a corrected conditional F-statistic is equivalent to the Cragg and Donald (1993) minimum eigenvalue rank test statistic, and is informative about the maximum total relative bias of the 2SLS estimator and the Wald tests size distortions. When δ = 0 in the two-variable model, or when there are more than two endogenous variables, further information over and above the Cragg-Donald statistic can be obtained about the nature of the weak instrument problem by computing the conditional first-stage F-statistics.

(A typo on page 27 that erroneously resulted in the OLS estimator instead of the 2SLS estimator was corrected in July 2015).