Estimation of 1 can be done in 2 steps:

1. Regress Xi* on Zi to obtain fitted values

^ ^ ( X i|Z i )= ^ 0 + ^ 1 Z i
X i= E
This result is a consequence of
X i= X i +V i

E ( X i|Z i )=E ( X i|Zi ) + E ( V i|Z i )

Since E ( V i|Zi ) =0 because V iZ i are independent , E ( X i|Z i )= E ( X i|Z i )

2. Regress Yi on XXI to obtain 1
E ( Y i|Z i ) = ^ 0+ ^1 ^
^ X1

Call:
lm(formula = log(wage) ~ educ + exper + I(exper^2) + IQ + black +
smsa, data = data1)

Residuals:
Min 1Q Median 3Q Max
-1.54043 -0.21708 0.02305 0.24191 1.36615

Coefficients:
Estimate Std. Error t value Pr(>|t|)
(Intercept) 4.4327611 0.1044557 42.437 < 2e-16 ***
educ 0.0700292 0.0049672 14.098 < 2e-16 ***
exper 0.0951279 0.0097012 9.806 < 2e-16 ***
I(exper^2) -0.0027266 0.0005016 -5.436 6.11e-08 ***
IQ 0.0025287 0.0006817 3.709 0.000214 ***
black -0.1614085 0.0260646 -6.193 7.17e-10 ***
smsa 0.1629938 0.0190604 8.551 < 2e-16 ***
---
Signif. codes: 0 *** 0.001 ** 0.01 * 0.05 . 0.1 1

Residual standard error: 0.3697 on 1993 degrees of freedom

Multiple R-squared: 0.2178, Adjusted R-squared: 0.2154
F-statistic: 92.49 on 6 and 1993 DF, p-value: < 2.2e-16
nearc2i = 1 if lived near a 2-year college in 1966, 0 otherwise
Correlated with educ and exogenous to ability

nearc4i = 1 if lived near a 4-year college in 1966, 0 otherwise

Correlated and exogenous

smsa66i = 1 if lived in a metropolitan area in 1966, 0 otherwise

Correlated cus metropolis got a lot of college with education. Exogenous
Uncorrelated cus suburb got colleges

momdad14i = 1 if lived with both parents at age 14, 0 otherwise

Correlated cus mom/dad make you study. Exogenous
Call:
lm(formula = educ ~ exper + I(exper^2) + IQ + black + smsa +
nearc2 + nearc4 + smsa66 + momdad14, data = data1)

Residuals:
Min 1Q Median 3Q Max
-4.6734 -1.1721 -0.1662 1.0241 6.0924

Coefficients:
Estimate Std. Error t value Pr(>|t|)
(Intercept) 11.410385 0.398366 28.643 < 2e-16 ***
exper -0.468911 0.042259 -11.096 < 2e-16 ***
I(exper^2) 0.010015 0.002241 4.468 8.32e-06 ***
IQ 0.048908 0.002857 17.118 < 2e-16 ***
black 0.174456 0.119790 1.456 0.145453
smsa 0.150258 0.109622 1.371 0.170625
nearc2 0.082788 0.077368 1.070 0.284724
nearc4 0.295311 0.090295 3.270 0.001092 **
smsa66 -0.099730 0.109200 -0.913 0.361209
momdad14 0.358955 0.102653 3.497 0.000481 ***
---
Signif. codes: 0 *** 0.001 ** 0.01 * 0.05 . 0.1 1

Residual standard error: 1.658 on 1990 degrees of freedom

Multiple R-squared: 0.4701, Adjusted R-squared: 0.4677
F-statistic: 196.1 on 9 and 1990 DF, p-value: < 2.2e-16
Call:
ivreg(formula = log(wage) ~ educ + exper + I(exper^2) + IQ +
black + smsa | exper + I(exper^2) + IQ + black + smsa + nearc2 +
nearc4 + smsa66 + momdad14, data = data1)

Residuals:
Min 1Q Median 3Q Max
-1.62027 -0.24702 0.02063 0.27968 1.25371

Coefficients:
Estimate Std. Error t value Pr(>|t|)
(Intercept) 3.1196420 0.6028675 5.175 2.51e-07 ***
educ 0.1811357 0.0503506 3.597 0.000329 ***
exper 0.1480115 0.0261742 5.655 1.78e-08 ***
I(exper^2) -0.0038752 0.0007631 -5.078 4.17e-07 ***
IQ -0.0029904 0.0026002 -1.150 0.250245
black -0.1712082 0.0294855 -5.807 7.41e-09 ***
smsa 0.1411551 0.0234788 6.012 2.17e-09 ***
---
Signif. codes:
0 *** 0.001 ** 0.01 * 0.05 . 0.1 1

Residual standard error: 0.4135 on 1993 degrees of freedom

Multiple R-Squared: 0.02143, Adjusted R-squared: 0.01849
Wald test: 49.61 on 6 and 1993 DF, p-value: < 2.2e-16