Unbiased instrumental variables estimation under known first-stage sign

Abstract

We derive mean-unbiased estimators for the structural parameter in instrumental variables models with a single endogenous regressor where the sign of one or more first-stage coefficients is known. In the case with a single instrument, there is a unique nonrandomized unbiased estimator based on the reduced-form and first-stage regression estimates. For cases with multiple instruments we propose a class of unbiased estimators and show that an estimator within this class is efficient when the instruments are strong. We show numerically that unbiasedness does not come at a cost of increased dispersion in models with a single instrument: in this case the unbiased estimator is less dispersed than the two-stage least squares estimator. Our finite-sample results apply to normal models with known variance for the reduced-form errors, and imply analogous results under weak-instrument asymptotics with an unknown error distribution. Keyword: unbiased estimation; weak instruments