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Re: st: Re: other ways in dealing with endogeneity other than IV?


From   "nicola.baldini2@unibo.it" <nicola.baldini2@unibo.it>
To   "statalist@hsphsun2.harvard.edu" <statalist@hsphsun2.harvard.edu>
Subject   Re: st: Re: other ways in dealing with endogeneity other than IV?
Date   Mon, 12 May 2008 07:42:54 -0700

Belated thanks to both Kit and Austin for correcting/clarifying my post and sorry to all Statalist members if was obscure or if it was/sounded at least partially wrong.
Nicola
At 02.33 08/05/2008 -0400, you wrote:
>In Austin's excellent Stata Journal (7:4, 2007) article, he discusses
>the usefulness of fixed effects models to deal with a certain kind of
>'endogeneity', which he describes as correlation between regressor
>and error. It is true that in the model
>
>y_it = X_it b + u_it
>
>on panel data, with X strictly exogenous, there will be an
>endogeneity problem if there is unobserved heterogeneity that depends
>only on who you are (only on i). This arises because the true DGP is
>
>y_it = X_it b + [ a_i + u_it]
>
>and if a_i (individual-specific characteristics) are correlated with
>observed X's, the error term is correlated with the regressors and
>OLS is inconsistent. That can be dealt with, as he discusses, with
>fixed effects, expressing a_i as a parameter to be estimated using
>individual-specific dummy variables or the within transformation, a
>la -xtreg, fe- or -areg-.
>
>BUT if the original assumption that X is exogenous -- uncorrelated
>with u -- is not appropriate, then there is conventional endogeneity
>in the equation as well as unobserved heterogeneity. Fixed effects
>will deal with the latter, but not the former, and fixed effects will
>be just as inconsistent as pooled OLS. That is the point I was
>making. In that circumstance you need an IV fixed-effects estimator
>such as that implemented by -xtivreg, fe- or -xtivreg2, fe-, or an
>estimator implementing the first difference transformation with IV (-
>xtivreg, fd- or -xtivreg2, fd-).
>
>
>Kit Baum, Boston College Economics and DIW Berlin
>http://ideas.repec.org/e/pba1.html
>An Introduction to Modern Econometrics Using Stata:
>http://www.stata-press.com/books/imeus.html
>
>
>On May 7, 2008, at 02:33 , Austin wrote:
>> Kit et al.--
>> A fixed-effects model deals with one very specific type of endogeneity
>> due to omitted variables that vary only across groups in i() and not
>> within.  Hence the discussion of -xtreg- in
>> http://www.stata-journal.com/article.html?article=st0136

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