Resumen de Implementing a strategy to reduce the instrument count in panel GMM

Maria Elena Bontempi, Irene Mammi

• he problem of instrument proliferation and its consequences—overfitting of the endogenous explanatory variables, biased instrumental-variables and generalized method of moments estimators, and weakening of the power of the overidentification tests—are well known. This article introduces a statistical method to reduce the instrument count. Principal component analysis is applied on the instrument matrix, and the principal-component analysis scores are used as instruments for the panel generalized method of moments estimation. This strategy is implemented through the new command pca2.