from this regression () in a second regression that also includes X_i^* in the regressor list.

The first regression is:

X_i^* = Z_i +W_i

The second regression is:

Y_i = b₁X_i^*+ b₂+ e_i

Under the null that X_i^* is uncorrelated with the error term, the test on b₂=0 will have the Student's t distribution. Section 7.3 shows how to do a Hausman-Wu test in TSP.

7.2 Instrumental Variable Estimation

TSP uses the command INST to perform instrumental variable estimation. IV or 2SLS are synonymous with INST. The form of the command is:

INST(INST=(list-of-instruments)) dep-var-name indep-vars;

The dependent and independent variables are specified as in OLS. The list of instruments should include any exogenous variables in the equation (including the constant) and any additional instruments you wish. At least as many instruments as independent variables are