Discussion
For which of the following the 2SLS method is most appropriate method of estimation ?
Answer: D
2SLS is most appropriate for an Over Identified Equation.
In simultaneous-equation models, an over-identified equation has more excluded exogenous variables than needed, so indirect least squares gives more than one estimate of the structural parameters. Two-stage least squares combines all the instruments into one: it first regresses the endogenous regressors on all exogenous variables, then uses the fitted values in the second stage.
An exactly identified equation can be estimated by indirect least squares (2SLS gives the same result), and an under-identified (unidentified) equation cannot be estimated by any method.
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