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st: ivreg and indicator variables

From   <>
Subject   st: ivreg and indicator variables
Date   Wed, 25 Sep 2002 10:36:38 -0400

Dear stata users,

I am estimating a model

y = a + b1x1 + b2x1x2 + b3x3 + e

x1 and x3 are continuous variables. x2 is an indicator variable taking 
the value 0 or 1. x1 is correlated with the error term e, thus I want 
to estimate this model via two stage least squares. I have an 
instrument z which is correlated with x1.  How do I estimate this model 
in Stata?

this does not work since I only have one instrument:

ivreg y (x1 x1x2 = z1) x3

but is it correct to estimate the first stage, then get the predicted 
value x2hat and to multiply the predicted value with x2, and run a 
regression with 

y = a + b1x1hat + b2x1hatx2 + b3x3 + e

If this is correct, how do I get the proper standard errors?

Thanks in advance for your help,


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