ABSTRACT
This chapter describes simultaneous relations and the endogeneity problem and estimation of simulation equations models; It discusses identification problem in simultaneous relations. The supply function posits that quantity supplied is determined by price and other factors. And the demand function assumes that price is determined by quantity demanded and other factors. The chapter eliminates the correlation between the disturbance and endogenous regressors. It involves regressing each endogenous regressor on a set of instrumental variables using the ordinary least squares method. The 3SLS method adds one more stage to the 2SLS in order to estimate all equations in a structural model. It begins by applying the 2SLS method separately to each of all equations in the system. In a simple case like the supply-and-demand model, each equation includes one endogenous explanatory variable. The results indicate that a portion of the single-equation bias can be mitigated by estimating the simultaneous equations.
