Assessing the Magnitude of the Concentration Parameter in a Simultaneous Equations Model

Poskitt and Skeels (2003) provide a new approximation to the sampling distribution of the IV estimator in a simultaneous equations model. This approximation is appropriate when the concentration parameter associated with the reduced form model is small and a basic purpose of this paper is to provide the practitioner with a method of ascertaining when the concentration parameter is small, and hence when the use of the Poskitt and Skeels (2003) approximation is appropriate. Existing procedures tend to focus on the notion of correlation and hypothesis testing. Approaching the problem from a different perspective leads us to advocate a different statistic for use in this problem. We provide exact and approximate distribution theory for the proposed statistic and show that it satisfies various optimality criteria not satisfied by some of its competitors. Rather than adopting a testing approach we suggest the use of p-values as a calibration device.