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st: ivreg2+first stage

From   Marcello Pagano <>
Subject   st: ivreg2+first stage
Date   Fri, 11 May 2007 06:02:22 -0400

From: Kit Baum <>
Date: May 10, 2007 8:24:25 PM EDT
Subject: ivreg2+first stage

sacrificial camel

Andrea said

I want to find the answer to a simple question.
Consider a panel data such as

y(it) = a + a1*x1(it) + a2*x2(it) + a(i) + u(it)

where x2 is predetermined or endogenous. I found a potential set of endogenous variable Z(it) to use as instrument. I know that applying ivreg to such equation provides consitent estimates of a, a1, a2 and u(it) [suppose all variable has been differenced to remove unobserved heterogeneity).

However, i'm also interested in estimating

x2(it) = b + b1*x1(it) + b2*Z(it) + a(i) + e(it),

the first stage of the iv regression. Is such an estimate consitently estimated by ivreg2, first?

Of course. If x1 and Z are appropriately uncorrelated with the e process, the FSRs of IV are consistent estimates. If diagnostics on the IV estimates indicate that you have not satisfied the orthogonality conditions (e.g. the Sargan-Hansen test), then you should question whether the FSRs are appropriately estimated by OLS.


Kit Baum, Boston College Economics and DIW Berlin
An Introduction to Modern Econometrics Using Stata:

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