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From |
"Vincent, David" <david.vincent@hp.com> |

To |
"statalist@hsphsun2.harvard.edu" <statalist@hsphsun2.harvard.edu> |

Subject |
st: RE: Economic Intuition of IV estimates |

Date |
Fri, 12 Feb 2010 11:26:07 +0000 |

Erasmo, Most linear economic models describe a causal relationship, where the parameters 'b' are interpreted as the causal-effects of the x-variables on the expected value of y. So in your model, if b=0.5, then an increase in tangible assets of 1 would lead to an expected rise in the leverage of 0.5. The OLS estimator will consistently estimate the expected leverage given tangible assets, or at least provide a best linear approximation, but will not be a consistent estimator for the causal parameter 'b' when the error term is correlated with the rhs variable. In this case we use IV/2SLS with instruments that are correalted with tangible assets but uncorrelated with the error term to identify 'b'. For more info, see any econometrics text (verbeek/Greene etc). David. David Vincent Econometrician Advanced Analytics Practice Hewlett-Packard Limited Mobile: +44 (0)7939 200 747 Internet: mailto:david.vincent@hp.com Hewlett-Packard Limited Registered Office: Cain Road, Bracknell, Berks RG12 1HN Registered No: 690597 England The contents of this message and any attachments to it are confidential and may be legally privileged. If you have received this message in error, you should delete it from your system immediately and advise the sender. To any recipient of this message within HP, unless otherwise stated you should consider this message and attachments as "HP CONFIDENTIAL". -----Original Message----- From: owner-statalist@hsphsun2.harvard.edu [mailto:owner-statalist@hsphsun2.harvard.edu] On Behalf Of Erasmo Giambona Sent: 12 February 2010 11:04 To: statalist Subject: st: Economic Intuition of IV estimates Dear Statalist, I am trying to gain more economic intuition on IV estimation. I am estimating the following model using a panel dataset of firm-year observations: Leverage Ratio = a + b*Tangible Assets+e. Suppose Tangible Assets is endogenous. My instrument is a proxy for Demand of Tangible Assets (Instrument1). Question 1) If I estimate the model using 2SLS, how do I interpret "b"? In particular, is it possible to state that "b" tells me how Demand of Tangible Assets affects the leverage ratio? Question 2) Suppose I have an additional instrument (e.g., Firm Age - Instrument 2) and let's assume this in unrelated to Leverage Ratio. If I estimate the model again using both Instruments, it seems that "b" does not tell me anymore ONLY how Demand of Tangible Assets affects the leverage ratio. Is my interpretation correct? Any thoughts on the issue is highly appreciated, Erasmo * * For searches and help try: * http://www.stata.com/help.cgi?search * http://www.stata.com/support/statalist/faq * http://www.ats.ucla.edu/stat/stata/ * * For searches and help try: * http://www.stata.com/help.cgi?search * http://www.stata.com/support/statalist/faq * http://www.ats.ucla.edu/stat/stata/

**Follow-Ups**:**Re: st: RE: Economic Intuition of IV estimates***From:*Erasmo Giambona <e.giambona@gmail.com>

**References**:**st: Economic Intuition of IV estimates***From:*Erasmo Giambona <e.giambona@gmail.com>

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