Simultaneous equations with error components

Abstract

In this paper we derive a limited as well as a full information estimator for the structural parameters of a simultaneous equations model with error components. Under this model, the gain in efficiency by performing these estimators rather than the classical two-stage and three-stage least squares procedures is demonstrated. It is shown that the full information estimator will reduce to the limited information estimator when the disturbances of different structural equations are uncorrelated with each other but not necessarily when all structural equations are just identified. This is different from the analogous situation in the classical case.