Helmut Farbmacher, Rebecca Groh, Michael Mühlegger, Gabriel Vollert
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Revisiting the Many Instruments Problem using Random Matrix Theory
We use recent results from the theory of random matrices to improve
instrumental variables estimation with many instruments. In settings where the
first-stage parameters are dense, we show that Ridge lowers the implicit price
of a bias adjustment. This comes along with improved (finite-sample) properties
in the second stage regression. Our theoretical results nest existing results
on bias approximation and bias adjustment. Moreover, it extends them to
settings with more instruments than observations.