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st: ivreg2+first stage
From: Kit Baum <firstname.lastname@example.org>
Date: May 10, 2007 8:24:25 PM EDT
Subject: ivreg2+first stage
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
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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