A Note on the Topology of the First Stage of 2SLS with Many Instruments

TL;DR

This paper examines the topological and asymptotic properties of the first stage of 2SLS with many instruments, revealing contradictions in common assumptions and emphasizing the importance of finite sample analysis.

Contribution

It highlights contradictions in existing asymptotic frameworks for many instruments and advocates for finite sample distributional studies to better understand estimator behavior.

Findings

Contradiction in the assumption that the number of effective instruments can be infinite.

Regularized estimators depend on topology and regularization parameters, affecting bias.

Limitations of asymptotic assumptions support the need for finite sample analysis.

Abstract

The finite sample properties of estimators are usually understood or approximated using asymptotic theories. Two main asymptotic constructions have been used to characterize the presence of many instruments. The first assumes that the number of instruments increases with the sample size. I demonstrate that in this case, one of the key assumptions used in the asymptotic construction may imply that the number of ``effective" instruments should be finite, resulting in an internal contradiction. The second asymptotic representation considers that the number of instrumental variables (IVs) may be finite, infinite, or even a continuum. The number does not change with the sample size. In this scenario, the regularized estimator obtained depends on the topology imposed on the set of instruments as well as on a regularization parameter. These restrictions may induce a bias or restrict the set of admissible instruments. However, the assumptions are internally coherent. The limitations of many IVs asymptotic assumptions provide support for finite sample distributional studies to better understand the behavior of many IV estimators.