Why do you use only some of the variation of your treatment variable (the component predicted in the first stage) when using an instrumental variable approach?
A. To avoid the heteroscedasticity problem.
B. To have the estimate of the treatment effect be based only on variation that is exogenous variation to the other factors affecting the outcome.
C. To get smaller standard errors.
D. To have the estimate of the treatment effect be based only on variation of the treatment that is correlated with the outcome.
Answer: B
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