LIMITED INFORMATION MAXIMUM LIKELIHOOD USING PRINCIPAL COMPONENTS AND ITS APPLICATION

In cases where the number of predetermined variables exceeds the sample size or strong multicollinearity occurs among excluded predetermined variables, the limited information maximum likelilhood and the least variance ratio cannot be used to estimate a simtultaneous equation system. We propose a method in which some effectively-influential principal components of excluded predetermined variables are employed as instrumental variables in place of the excluded predetermined variables. Then we demonstrate the estimation of a Cobb-Douglas agricutural production function with the proposed method.