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What is reduced form in IV?

The basic idea of the reduced form is that you have an outcome of interest y, and you have exogenous variation in some variable z (your instrument). Assuming you have a valid instrument, regressing y on z satisfies population orthogonality and thus provides a consistent estimate of the effect of z and y.

What is the meaning of reduced form?

In statistics, and particularly in econometrics, the reduced form of a system of equations is the result of solving the system for the endogenous variables. This gives the latter as functions of the exogenous variables, if any.

What is a reduced form relationship?

Reduced-form models evaluate endogenous variables in terms of observable exogenous variables and serve to identify relationships between the variables. Structural models are derived from theory and often include unobservable parameters that help describe behavior at a deep level.

What is reduced form evidence?

Structural forms or equations are based on some underlying economic model. The reduced form of a set of structural equations, on the other hand, is the form produced by solving for each dependent variable such that the resulting equations express the endogenous variables as functions of the exogenous variables.

What is reduced form impact?

Definition. A reduced form is a functional or stochastic mapping for which the inputs are (i) exogenous variables and (ii) unobservables (structural errors), and for which the outputs are endogenous variables. e.g., Y = f (X,Z,U).

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