I am studying the effect of social capital on households' income. I am doing multiple regression to estimate this effect. For this, I have households' income as dependent variable and social capital as explanatory variable. I have also included human capital and some other household characteristics as control variables for multiple regression. Social capital and household income have two-way causality as it is argued that social capital is endogenous variable. This is proven theoretically and empirically in various research studies. To avoid this problem and to get unbiased and consistent estimates. I intend to use two stage linear regression (2SLS) or instrumental variable technique. Can someone suggest which method is preferable in my case and how to perform my analysis exactly in both cases if:
- I have valid instrument, or
- I don't have valid instrument for the endogenous variable?