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Re: st: IV list in ivreg and ivreg2

From   "Mark Schaffer" <[email protected]>
To   [email protected]
Subject   Re: st: IV list in ivreg and ivreg2
Date   Mon, 19 Apr 2004 16:57:27 +0100


Date sent:      	Mon, 19 Apr 2004 08:36:15 -0700 (PDT)
From:           	Eddy <[email protected]>
Subject:        	Re: st: IV list in ivreg and ivreg2
To:             	[email protected]
Send reply to:  	[email protected]

> Hi Mark,
> Thanks for your reply; please see my response below.
> Monday, April 19, 2004, Mark Schaffer wrote:
> >> Dear listers,
> >> 
> >> When using ivreg or ivreg2 to do a 2SLS estimation, all the RHS
> >> variables except those explicitly specified as endogenous are
> assumed
> >> to be exogenous and valid IV. Call those the "included exogenous
> >> variables". However, I happen to have a case in which not all the
> >> "included exogenous variables" are valid IV, and I am asking
> whether
> >> users can have better control over the list of IV to be used in
> the
> >> 2SLS estimation.
> > I'm not sure this makes sense.  A "valid" IV is one that satisfies 
> > the orthogonality conditions; this is synonymous with "exogenous". 
> > If one of your regressors isn't a valid IV, then it isn't exogenous
> > and you need to treat it as endogenous.  This is the way that IV 
> > works (or, in modern presentations, GMM with IV as a special case).
> > In your example, ln(P) might or might not be be orthogonal to the 
> > disturbance term.  If it is, it's a valid IV and you can treat it
> as 
> > exogenous; if it isn't, it's not a valid IV and you should treat it
> > as endogenous.  It sounds like you lean towards the latter, which 
> > looks like a reasonable way to proceed (so long as you have enough 
> > other valid excluded instruments to identify the equation, and they
> > are "relevant" as well as "valid").
>   ln(W/P) = a0 + a1*ln(P) + a2*y + B*X,
> It's correct that ln(P) is endogenous because the dependent variable
> is ln(W/P)=ln(W) - ln(P),

This isn't necessarily the case.  It's quite possible that ln(P) 
could be exogenous even though it's used to calculate ln(W/P).  It 
depends on your priors and the data generating process (and 
everything else).

> but the problem is that I do not want to
> deal with the endogeneity of ln(P), and I don't want it to be part of
> the IV for the other endogenous variable, y,

I'm not sure what you mean here.  If ln(P) is an exogenous regressor, 
then it's an "included IV" by definition.  Not a problem for you.

> whose coefficient is the
> ultimate concern of this study.
> I do not want to treat the endogeneity of ln(P) because (1) the ln(P)
> variable is only to control for heterogenous preference, and we do
> not
> really care about the coefficient of ln(P), (2) to the extent that
> ln(P) are independent of y and X, the endogeneity problem of ln(P)
> does not have adverse effect on the coefficients of y and X, (3) the
> work I want to follow/replicate does not treat its endogeneity
> (Carroll and Samwick, "The Nature of Precautionary Wealth", Journal
> of
> Monetary Economics, 1997), and (4) good IV for ln(P) maybe difficult
> to come by.

If the work that you want to replicate treats ln(P) as exogenous, and 
good IVs for ln(P) are hard to come by, then the decision to treat it 
as exogenous seems to be defensible in your case.

As I said in my previous posting, either you treat ln(P) as exogenous 
or endogenous.  There isn't any third way, at least in IV-GMM.  It 
looks like either approach is legitimate in your case.

Hope this helps.


> I know this is a rather uncommon case, so I would appreciate any
> suggestion.
> Eddy
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Prof. Mark E. Schaffer
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
44-131-451-3008 fax
44-131-451-3485 CERT administrator

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