Instrumental Variables Estimation in Large Heterogeneous Panels with Multifactor Structure

Abstract The paper proposes new instrumental variables estimators for the slope parameters of a panel data model with classical endogeneity in which all the observables – including the instruments – may have a common factors structure. These estimators are shown to be consistent and asymptotically normal under weak regularity conditions. A small Monte Carlo simulation shows that these estimators compare favourably to existing estimators.