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From |
"Mark Schaffer" <M.E.Schaffer@hw.ac.uk> |

To |
statalist@hsphsun2.harvard.edu |

Subject |
Re: st: How to instrument for an interaction term in the ivreg2 |

Date |
Thu, 05 May 2005 11:20:10 +0100 |

Binzhen, Date sent: Thu, 05 May 2005 00:28:06 -0500 From: BINZHEN WU <binzhenwu@students.wisc.edu> Subject: st: How to instrument for an interaction term in the ivreg2 To: statalist@hsphsun2.harvard.edu Send reply to: statalist@hsphsun2.harvard.edu > Dear Statalist, > > I have a problem in a linear regression analogue to the difference-in- > difference method. The regression runs as the following. > > Y=aT+bZ+cTZ+dX, > Here, TZ=T*Z is the interaction term, T is the time dummy (=1 after > the policy change), and Z are the continuous endogenous treatments, X > are exogenous variables. > > The instruments for Z is W and V. TW and TV are considered as > instruments for T*Z. This is a misleading way of thinking about IV/2SLS. The endogenous regressors are projected on all the instruments. If you want to impose constraints (e.g., TW doesn't influence Z), you would need to use a system estimator. > I am think about the following procedure: > 1) predict Z from W, V, TW, TV, T, and X, denoted as Z' > 2) let TZ'=T*Z'. > 3) run regression of Y on Z', TZ', T, and X. This is called a "forbidden regression". See e.g. Wooldridge (2000), Econometric Analysis of Cross Section and Panel Data, section 9.5, esp. pp. 236-7. This has come up before on Statalist: http://www.stata.com/statalist/archive/2003-11/msg00795.html > > However, it seems that I cannot implement the procedure by ivreg2. > > "ivreg2 Y T X (TZ Z=W V TW TV)" is doing the following procedure: 1) > predict TZ from W, V, TW, TV,T, and X, denoted as (TZ)' 2) predict Z > from W, V, TW, TV, T, and X, denoted as Z' 3) run regression of Y on > Z', (TZ)', T, and X. ivreg2 does this in one step, but intuitively you have described it correctly. Unlike your suggestion above, it will generate consistent estimates of the parameters and SEs (with the usual extra assumptions, of course). Hope this helps. Cheers, Mark > Can anyone tell me which procedure is better? Is there a > command/syntax to implement the first procedure and adjust the > standard errors at the same time. > > Thank you in advance. > > Binzhen > > > * > * For searches and help try: > * http://www.stata.com/support/faqs/res/findit.html > * http://www.stata.com/support/statalist/faq > * http://www.ats.ucla.edu/stat/stata/ Prof. Mark E. Schaffer Director Centre for Economic Reform and Transformation Department of Economics School of Management & Languages Heriot-Watt University, Edinburgh EH14 4AS UK 44-131-451-3494 direct 44-131-451-3296 fax 44-131-451-3485 CERT administrator http://www.sml.hw.ac.uk/cert * * For searches and help try: * http://www.stata.com/support/faqs/res/findit.html * http://www.stata.com/support/statalist/faq * http://www.ats.ucla.edu/stat/stata/

**References**:**st: How to instrument for an interaction term in the ivreg2***From:*BINZHEN WU <binzhenwu@students.wisc.edu>

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