Empirics of Agricultural Production: Comparison of Instrumental Variable and Two Stage Least Square Approach

The study uses data for a set of 81 countries from World Development Indicators from year 2002 to 2015 while applied 2SLS and Instrumental variable approach to estimate the coefficients associated with standard production function of agricultural production and compares its results with the coefficients obtained through OLS. The argument behind this approach that in the standard form, capital is likely to be endogenous in the production function and if it is true, the coefficients obtained through OLS would be inconsistent. Capital is found to be endogenous in the study. It is also noticed as endogeneity exist in our framework and the causal relationships can be controlled through instrumental variable approach (I.V.). The coefficients from I.V approach and 2SLS are compared with OLS estimates. I.V and 2SLS coefficients are found to be slightly different however, the obtained coefficients through both approaches are more reliable than the coefficients obtained through OLS. It is suggested therefore that the approaches like I.V approach and 2SLS should be employed in the studies pertaining to this area of research.