Hello,
I am trying to estimate the following model using instrumental variables.
The final stage has two independent variables of interest, plus an
interaction between them:
Z = aX + bY + c(X*Y) + more variables
I want to instrument variable X in a first stage regression using a set of
instruments that contain Y and some other variables that are not in the
final stage. Of course the variable X*Y will have to reflect this
instrumenting as well.
How can I use ivreg to do this? I can't figure out how I can use the first
stage to predict X, and then use it in the final stage both by itself and as
an interaction.
If ivreg can't do this, I know I can still get coefficients by estimating 2
separate regressions in sequence using the predicted values of X in the
final stage, but how do I correct the standard errors? To make things more
complicated, I also want to use robust and cluster( ).
Thank you for any suggestions.
Sewin Chan
Assistant Professor of Public Policy
New York University
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