179 IV8 Overidentification and the Sargan Hansen test

This video delves into the concept of over-identification tests in econometrics, specifically the Sargan-Hansen test. It explains how having more instrumental variables than endogenous variables allows for testing the validity of the instruments. We explore the difference between just-identified and over-identified models and how the surplus information in the latter enables these crucial tests. The video highlights the intuition behind these tests: valid instruments should collectively point to the same causal effect, and significant disagreement among them signals a problem. It clarifies that passing the Sargan-Hansen test is evidence of instrument consistency, not absolute validity, and discusses its limitations, particularly when instruments fail in a consistent direction. Visit AxiomTutoring.com and subscribe to @AxiomTutoringCourses.