Why results of OLS and 2SLS are different from each other.
Which assumption of the OLS regression is violated and how is it
violated.
The 2SLS as a technique is simply an extension of the OLS method. There are times a researcher analysis requires 2SLS. For example if the dependent variable’s error terms are correlated with the independent variables. Again the 2SLS is especially useful when there are feedback loops in the model. In structural equations modeling, 2SLS captures the maximum likelihood method to estimate the path coefficient which is commonly applied in quasi-experimental studies. The difference between the two conceptually is in the elongation of OLS model by 2SLS and not there is any fundamental departure in theory.
2SLS is used as an alternative approach when we face endogenity Problem in OLS. When explanatory variable correlate with error term then endogenity problem occurs.then we use 2SLS where we use instrumental variable.
The result will be different as if there is endogenity in the model OLS will show biased outcome.
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