Machine learning the first stage in 2SLS: Practical guidance from bias decomposition and simulation
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| Format: | Preprint |
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2025
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| _version_ | 1866916744569815040 |
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| author | Lennon, Connor Rubin, Edward Waddell, Glen |
| author_facet | Lennon, Connor Rubin, Edward Waddell, Glen |
| contents | Machine learning (ML) primarily evolved to solve "prediction problems." The first stage of two-stage least squares (2SLS) is a prediction problem, suggesting potential gains from ML first-stage assistance. However, little guidance exists on when ML helps 2SLS$\unicode{x2014}$or when it hurts. We investigate the implications of inserting ML into 2SLS, decomposing the bias into three informative components. Mechanically, ML-in-2SLS procedures face issues common to prediction and causal-inference settings$\unicode{x2014}$and their interaction. Through simulation, we show linear ML methods (e.g., post-Lasso) work well, while nonlinear methods (e.g., random forests, neural nets) generate substantial bias in second-stage estimates$\unicode{x2014}$potentially exceeding the bias of endogenous OLS. |
| format | Preprint |
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arxiv_https___arxiv_org_abs_2505_13422 |
| institution | arXiv |
| publishDate | 2025 |
| record_format | arxiv |
| spellingShingle | Machine learning the first stage in 2SLS: Practical guidance from bias decomposition and simulation Lennon, Connor Rubin, Edward Waddell, Glen Econometrics Machine Learning Applications Machine learning (ML) primarily evolved to solve "prediction problems." The first stage of two-stage least squares (2SLS) is a prediction problem, suggesting potential gains from ML first-stage assistance. However, little guidance exists on when ML helps 2SLS$\unicode{x2014}$or when it hurts. We investigate the implications of inserting ML into 2SLS, decomposing the bias into three informative components. Mechanically, ML-in-2SLS procedures face issues common to prediction and causal-inference settings$\unicode{x2014}$and their interaction. Through simulation, we show linear ML methods (e.g., post-Lasso) work well, while nonlinear methods (e.g., random forests, neural nets) generate substantial bias in second-stage estimates$\unicode{x2014}$potentially exceeding the bias of endogenous OLS. |
| title | Machine learning the first stage in 2SLS: Practical guidance from bias decomposition and simulation |
| topic | Econometrics Machine Learning Applications |
| url | https://arxiv.org/abs/2505.13422 |