Local Asymptotics: The Simplest Possible Example

If you study enough econometrics, you will eventually come across an asymptotic argument in which some parameter is assumed to change with sample size. This peculiar notion goes by a variety of names including “Pitman drift,” a “sequence of local alternatives,” and “local mis-specification,” and crops up in a wide range of problems from weak instruments, to model selection, to power analysis.

Three Ways of Thinking About Instrumental Variables

In this post we’ll examine a very simple instrumental variables model from three different perspectives: two familiar and one a bit more exotic. While all three yield the same solution in this particular model, they lead in different directions in more complicated examples.