Simultaneous Equations

Ani Katchova

© 2020 by Ani Katchova. All rights reserved.

Outline
• Simultaneous equations – definition
• Simultaneity bias
• 2SLS estimation for simultaneous equations
• Testing for rank condition

2
Simultaneous equations
• Simultaneous equations are estimated when at least two variables
are jointly determined.
• The most frequent case is when the two variables are the outcome of
a system in equilibrium.
• Examples:
• supply and demand equations with price and quantity jointly determined
• labor supply and demand with hours worked and wage jointly determined
• Simultaneity is another form of endogeneity.
• Simultaneous equations can be estimated using IV and 2SLS.

3
Simultaneity bias
• Structural equations
𝑦𝑦1 = 𝛽𝛽0 + 𝛽𝛽1 𝑦𝑦2 + 𝛽𝛽2 𝑧𝑧1 + 𝑢𝑢1
𝑦𝑦2 = 𝛼𝛼0 + 𝛼𝛼1 𝑦𝑦1 + 𝛼𝛼2 𝑧𝑧2 + 𝑢𝑢2
• Insert the first equation into the second equation:
• 𝑦𝑦2 = 𝛼𝛼0 + 𝛼𝛼1 (𝛽𝛽0 + 𝛽𝛽1 𝑦𝑦2 + 𝛽𝛽2 𝑧𝑧1 + 𝑢𝑢1 ) + 𝛼𝛼2 𝑧𝑧2 + 𝑢𝑢2
• 𝑦𝑦2 1 − 𝛼𝛼1 𝛽𝛽1 = 𝛼𝛼0 + 𝛼𝛼1 𝛽𝛽0 + 𝛼𝛼1 𝛽𝛽2 𝑧𝑧1 + 𝛼𝛼2 𝑧𝑧2 + 𝛼𝛼1 𝑢𝑢1 + 𝑢𝑢2
𝑦𝑦2 = (𝛼𝛼0 + 𝛼𝛼1 𝛽𝛽0 )/ (1 − 𝛼𝛼1 𝛽𝛽1 ) + 𝛼𝛼1 𝛽𝛽2 /(1 − 𝛼𝛼1 𝛽𝛽1 )𝑧𝑧1 + 𝛼𝛼2 /(1 − 𝛼𝛼1 𝛽𝛽1 )𝑧𝑧2 + (𝛼𝛼1 𝑢𝑢1 + 𝑢𝑢2 )/ (1 − 𝛼𝛼1 𝛽𝛽1 )
• Here, 𝑦𝑦2 is correlated with the error term 𝑢𝑢1 , so 𝑦𝑦2 is endogenous in the equation for 𝑦𝑦1 .
• Renaming the coefficients, the reduced form equation for 𝑦𝑦2 :
𝑦𝑦2 = 𝛿𝛿0 + 𝛿𝛿1 𝑧𝑧1 + 𝛿𝛿2 𝑧𝑧2 + 𝑒𝑒1
• The structural equation will produce biased and inconsistent estimators, but the reduced form
equation will produce unbiased and consistent estimators because 𝑧𝑧1 and 𝑧𝑧2 are not correlated with
the new error term.
• Same procedure can be applied for the other equation.
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2SLS estimation for simultaneous equations
• The simultaneous equations can be consistently estimated by 2SLS
(two stage least squares).
• In the first stage, the endogenous variable is regressed on the
exogenous variables and instruments from the other equation.
• In the second stage, the endogenous variables are replaced by the
predicted values from the first stage, and the equations are estimated
by OLS.

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Simultaneous equations – 2SLS estimation
• Structural equations
𝑦𝑦1 = 𝛽𝛽0 + 𝛽𝛽1 𝑦𝑦2 + 𝛽𝛽2 𝑧𝑧1 + 𝑢𝑢1
𝑦𝑦2 = 𝛼𝛼0 + 𝛼𝛼1 𝑦𝑦1 + 𝛼𝛼2 𝑧𝑧2 + 𝑢𝑢2
• 𝑧𝑧2 is a good instrument for 𝑦𝑦2 because 𝑧𝑧2 is not in the 𝑦𝑦1 equation and 𝑧𝑧2 is related to 𝑦𝑦2.
• 𝑧𝑧1 is a good instrument for 𝑦𝑦1 because 𝑧𝑧1 is not in the 𝑦𝑦2 equation and 𝑧𝑧1 is related to 𝑦𝑦1 .
• 2SLS, first stage: reduced form, regress endogenous variables on all exogenous variables and get
predicted values
First stage for eq 1: endogenous variable 𝑦𝑦2 on instrument 𝑧𝑧2 and other exogenous variable 𝑧𝑧1
𝑦𝑦�2 = 𝛿𝛿̂0 + 𝛿𝛿̂1 𝑧𝑧1 + 𝛿𝛿̂2 𝑧𝑧2
First stage for eq 2: endogenous variable 𝑦𝑦1 on instrument 𝑧𝑧1 and other exogenous variable 𝑧𝑧2
𝑦𝑦�1 = 𝛾𝛾�0 + 𝛾𝛾�1 𝑧𝑧1 + 𝛾𝛾�2 𝑧𝑧2
• 2SLS, second stage: estimate the equations by replacing the predicted values from first stage for the
endogenous variables
𝑦𝑦1 = 𝛽𝛽0 + 𝛽𝛽1 𝑦𝑦�2 + 𝛽𝛽2 𝑧𝑧1 + 𝑢𝑢1
𝑦𝑦2 = 𝛼𝛼0 + 𝛼𝛼1 𝑦𝑦�1 + 𝛼𝛼2 𝑧𝑧2 + 𝑢𝑢2
6
Simultaneous equations example
• Labor supply and demand for working women.
• Labor supply of married, working women (hours worked):
ℎ𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜 = 𝛽𝛽0 + 𝛽𝛽1 𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙 + 𝛽𝛽2 𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒 + 𝛽𝛽3 𝑎𝑎𝑎𝑎𝑎𝑎 + 𝛽𝛽4 𝑘𝑘𝑘𝑘𝑘𝑘𝑘𝑘𝑘𝑘𝑘𝑘𝑘 + 𝛽𝛽5 𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛 + 𝑢𝑢1
• where 𝑘𝑘𝑘𝑘𝑘𝑘𝑘𝑘𝑘𝑘𝑘𝑘𝑘 is number of kids under 6 years old and 𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛 is non-
wife income.
• Labor demand for married, working women (wages offered):
𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙 = 𝛼𝛼0 + 𝛼𝛼1 ℎ𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜 + 𝛼𝛼2 𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒 + 𝛼𝛼3 𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒 + 𝛼𝛼4 𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑟𝑟 2 + 𝑢𝑢2
• Age, number of young children, and non-wife income is a determinant of
the supply of labor (ℎ𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜) but not the demand for labor (wages paid) and
can be an instrument for 𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙. Also, experience is a determinant of
𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙 but not how many hours women work and can be used as an
instrument for ℎ𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜.

7
Simultaneous equations – 2SLS estimation
• Structural equations
ℎ𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜 = 𝛽𝛽0 + 𝛽𝛽1 𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙 + 𝛽𝛽2 𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒 + 𝛽𝛽3 𝑎𝑎𝑎𝑎𝑎𝑎 + 𝛽𝛽4 𝑘𝑘𝑘𝑘𝑘𝑘𝑘𝑘𝑘𝑘𝑘𝑘𝑘 + 𝛽𝛽5 𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛 + 𝑢𝑢1
𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙 = 𝛼𝛼0 + 𝛼𝛼1 ℎ𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜 + 𝛼𝛼2 𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒 + 𝛼𝛼3 𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒 + 𝛼𝛼4 𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑟𝑟 2 + 𝑢𝑢2
• 𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒 2and 𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑟𝑟 2 are instruments for 𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙 (𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒 and 𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑟𝑟 2 are not in the ℎ𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜 equation, and 𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒 and
𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑟𝑟 are related to 𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙)
• Same for 𝑎𝑎𝑎𝑎𝑎𝑎, 𝑘𝑘𝑘𝑘𝑘𝑘𝑘𝑘𝑘𝑘𝑘𝑘𝑘, and 𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛 being good instruments for ℎ𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜.
• 2SLS, first stage: reduced form, regress endogenous variables on all exogenous variables and get predicted values
First stage for eq 1: endogenous variable 𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙 on instruments 𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒 and 𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑟𝑟 2 and exogenous variables
𝑙𝑙𝑤𝑤𝑤𝑤𝑤𝑤𝑤𝑤 = 𝛿𝛿0 + 𝛿𝛿1 𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒 + 𝛿𝛿2 𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑟𝑟 2 + 𝛿𝛿3 𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒 + 𝛿𝛿4 𝑎𝑎𝑎𝑎𝑎𝑎 + 𝛿𝛿5 𝑘𝑘𝑘𝑘𝑘𝑘𝑘𝑘𝑘𝑘𝑘𝑘𝑘 + 𝛿𝛿6 𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛 + 𝑒𝑒1
First stage for eq 2: endogenous variable ℎ𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜 on instrument 𝑎𝑎𝑎𝑎𝑎𝑎, 𝑘𝑘𝑘𝑘𝑘𝑘𝑘𝑘𝑘𝑘𝑘𝑘𝑘, and 𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛 and exogenous variables
ℎ𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜 = 𝛾𝛾0 + 𝛾𝛾1 𝑎𝑎𝑎𝑎𝑎𝑎 + 𝛾𝛾2 𝑘𝑘𝑘𝑘𝑘𝑘𝑘𝑘𝑘𝑘𝑘𝑘𝑘 + 𝛾𝛾3 𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛 + 𝛾𝛾4 𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒 + 𝛾𝛾5 𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒 + 𝛾𝛾6 𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑟𝑟 2 + 𝑒𝑒2
• 2SLS, second stage: estimate the equations by using the predicted values from first stage for endogenous variables
� + 𝛽𝛽2 𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒 + 𝛽𝛽3 𝑎𝑎𝑎𝑎𝑎𝑎 + 𝛽𝛽4 𝑘𝑘𝑘𝑘𝑘𝑘𝑘𝑘𝑘𝑘𝑘𝑘𝑘 + 𝛽𝛽5 𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛 + 𝑢𝑢1
ℎ𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜 = 𝛽𝛽0 + 𝛽𝛽1 𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙
� + 𝛼𝛼2 𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒 + 𝛼𝛼3 𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒 + 𝛼𝛼4 𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑟𝑟 2 + 𝑢𝑢2
𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙 = 𝛼𝛼0 + 𝛼𝛼1 ℎ𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜

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Simultaneous equations - OLS vs 2SLS
OLS 2SLS 2SLS
first stage second stage In the OLS model, the effect of wage on hours
VARIABLES hours lwage hours worked is not significant.
lwage -2.047 1,639.556*** In the 2SLS, there is a significant effect of wage
(54.880) (470.576) on hours worked. The coefficient on lwage in
exper 0.042*** the hours equation is 1,640. For each 1%
(0.013) increase in wages, hours worked increase by
expersq -0.001* 16.40 hours.
(0.000) The magnitude and significance of the
educ -6.622 0.101*** -183.751*** coefficients change using OLS vs 2SLS.
(18.116) (0.015) (59.100)
age 0.562 -0.003 -7.806 The coefficients on the instruments exper, and
(5.140) (0.005) (9.378) expersq are individually significant. An F-test
kidslt6 -328.858*** -0.053 -198.154 shows that these coefficients are jointly
(101.457) (0.088) (182.929) significant.
nwifeinc -5.918 0.006* -10.170
(3.683) (0.003) (6.615)
Constant 1,523.775*** -0.447 2,225.662***
(305.575) (0.285) (574.564) 9
Simultaneous equations - OLS vs 2SLS
OLS 2SLS 2SLS
first stage second stage In the OLS model, the effect of hours on wage
VARIABLES lwage hours lwage is not significant.
hours -0.0001 0.0001 In the 2SLS, effect of hours on wage is also not
(0.00004) (0.0003) significant.
age -15.710*** The OLS results are very similar to the 2SLS
(5.687) results for this equation.
kidslt6 -294.838***
(96.876) Two of the three coefficients on the
nwifeinc -0.107 instruments age, kidslt6, and nwifeinc are
(3.626) individually significant. An F-test shows that
educ 0.106*** -17.757 0.110*** these coefficients are jointly significant.
(0.014) (16.389) (0.016)
exper 0.045*** 51.739*** 0.035*
(0.013) (14.500) (0.019)
expersq -0.001** -0.576 -0.001
(0.000) (0.439) (0.000)
Constant -0.462** 1,691.031*** -0.656*
(0.204) (312.404) (0.338) 10
Order and rank conditions for identification
• The order condition states that an equation is identified if at least one of
the exogenous variables is excluded from this equation.
• The rank condition states that an equation is identified if and only if the
other equation includes at least one exogenous variable that is excluded
from this equation.
𝑦𝑦1 = 𝛽𝛽0 + 𝛽𝛽1 𝑦𝑦2 + 𝛽𝛽2 𝑧𝑧1 + 𝑢𝑢1
𝑦𝑦2 = 𝛼𝛼0 + 𝛼𝛼1 𝑦𝑦1 + 𝛼𝛼2 𝑧𝑧2 + 𝑢𝑢2
• For the equation for 𝑦𝑦1 to be identified, 𝑧𝑧2 need to be excluded from this
equation and included in the other equation of 𝑦𝑦2 .
• These are the properties for 𝑧𝑧2 to serve as an instrument for 𝑦𝑦2 (excluded
from the equation for 𝑦𝑦1 and included in the equation for 𝑦𝑦2 ).

11
Testing for the rank condition
• The rank condition states that the exogenous variables that are
excluded from the equation are included in the other equation. This
can be tested using the reduced form equation.
• For the equation for 𝑦𝑦1 to be identified 𝑦𝑦1 = 𝛽𝛽0 + 𝛽𝛽1 𝑦𝑦2 + 𝛽𝛽2 𝑧𝑧1 + 𝑢𝑢1 ,
there needs to be at least one good instrument 𝑧𝑧2 for 𝑦𝑦2 .
• Estimate the reduced form equation: 𝑦𝑦2 = 𝛿𝛿0 + 𝛿𝛿1 𝑧𝑧1 + 𝛿𝛿2 𝑧𝑧2 + 𝑒𝑒1 ,
and test whether the coefficient on the instrument variable 𝑧𝑧2 is
significant.
• H0: 𝛿𝛿2 = 0 (equation for 𝑦𝑦1 is not identified)
• H0: 𝛿𝛿2 ≠ 0 (equation for 𝑦𝑦1 is identified)

12
Testing for rank condition
• Testing for the rank condition: for the equation for ℎ𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜 to be identified, there needs to
be at least one exogenous variable that is excluded from the equation for ℎ𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜 and
included in the equation for 𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙.
• Estimate the reduced form equation for 𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙:
• 𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙 = 𝛿𝛿0 + 𝛿𝛿1 𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒 + 𝛿𝛿2 𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑟𝑟 2 + 𝛿𝛿3 𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒 + 𝛿𝛿4 𝑎𝑎𝑎𝑎𝑎𝑎 + 𝛿𝛿5 𝑘𝑘𝑘𝑘𝑘𝑘𝑘𝑘𝑘𝑘𝑘𝑘𝑘 + 𝛿𝛿6 𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛 + 𝑒𝑒1
• 𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒 and 𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑟𝑟 2 are the instruments for 𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙.
• Test if coefficients 𝛿𝛿1 and 𝛿𝛿2 on 𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒 and 𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑟𝑟 2 are jointly significantly different from
zero.
• H0: 𝛿𝛿1 = 0 and 𝛿𝛿2 = 0 (equation for ℎ𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜 is not identified)
• H0: 𝛿𝛿1 ≠ 0 or 𝛿𝛿2 ≠ 0 (equation for ℎ𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜 is identified)
• F-statistic=9.33 and p-value=0.0001. The coefficients are jointly significant.
• Rank condition is satisfied and the equation for ℎ𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜 is identified.

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Testing for rank condition
• Testing for rank condition: for the equation for 𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙 to be identified, there needs to be
at least one exogenous variable that is excluded from the equation for 𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙 and
included in the equation for ℎ𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜.
• Estimate the reduced form equation for ℎ𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜:
• ℎ𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜 = 𝛾𝛾0 + 𝛾𝛾1 𝑎𝑎𝑎𝑎𝑎𝑎 + 𝛾𝛾2 𝑘𝑘𝑘𝑘𝑘𝑘𝑘𝑘𝑘𝑘𝑘𝑘𝑘 + 𝛾𝛾3 𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛 + 𝛾𝛾4 𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒 + 𝛾𝛾5 𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒 + 𝛾𝛾6 𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑒𝑟𝑟 2 + 𝑒𝑒2
• 𝑎𝑎𝑎𝑎𝑎𝑎, 𝑘𝑘𝑘𝑘𝑘𝑘𝑘𝑘𝑘𝑘𝑘𝑘𝑘, and 𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛 are the instruments for ℎ𝑜𝑜𝑜𝑜𝑜𝑜𝑜𝑜.
• Test if coefficients 𝛾𝛾1 and 𝛾𝛾2 and 𝛾𝛾3 on 𝑎𝑎𝑎𝑎𝑎𝑎, 𝑘𝑘𝑘𝑘𝑘𝑘𝑘𝑘𝑘𝑘𝑘𝑘𝑘, and 𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛𝑛 are jointly
significantly different from zero.
• H0: 𝛾𝛾1 = 0 and 𝛾𝛾2 = 0 and 𝛾𝛾3 = 0 (equation for 𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙 is not identified)
• H0: 𝛾𝛾1 ≠ 0 or 𝛾𝛾2 ≠ 0 or 𝛾𝛾3 ≠ 0 (equation for 𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙 is identified)
• F-statistic=4.46 and p-value=0.0043. The coefficients are jointly significant.
• Rank condition is satisfied and the equation for 𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙𝑙 is identified.

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Review questions
• What causes the endogeneity bias in simultaneous equations?
• Describe the 2SLS procedure for simultaneous equations.
• Describe the rank condition and testing for the rank condition.

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