Demonstrating instrumental variable analysis in R

To illustrate more instrumental variable analysis in R, focusing on the context of assessing rental unit prices tested by a real estate company, we’ll go through setting up the R environment, utilizing the ivreg package for 2SLS regression again. We'll be implementing the Generalized Method of Moments (GMM) using the gmm package, and conducting diagnostics tests. First, this example will involve creating synthetic data to simulate a realistic scenario involving multiple variables that might influence rental prices.

To begin, let’s install several R packages essential for instrumental variable analysis:

install.packages("AER") # For 2SLS regression
install.packages("gmm") # For GMM estimators
install.packages("lmtest") # For diagnostic tests
# Load the packages
library(AER)
library(gmm)
library(lmtest)

For this example, we’ll generate synthetic data representing various...