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st: Endogenous right hand side variable

From   Maarten A Allers <[email protected]>
To   [email protected]
Subject   st: Endogenous right hand side variable
Date   Fri, 18 Jan 2008 09:36:24 +0100

Dear All,

Reading this thread puzzles me. Rodrigo's suggestion appears to be
different from Mark's, although it seems to be meant as a clarification.
Rodrigo's solution is described in Wooldridge (2002, p. 574,
I have a slightly different model:

y1 = a*x1 + b*y3 +e1
y2 = c*x2 + e2
y3 = max(0 , y2)
where y2 is potentially endogenous, and only observed when y2>0. y1, y3,
x1 and x2 are always observed.

My model differs from Rodrigo's (and Wooldridge's) model because y1 is
always observed, whereas, in Rodrigo's model, both y1 and y2 are
unobserved when y2<0. My model seems more in line with Kathleen's
original question.

I think I should:
1) estimate y2 by -tobit-
2) use fitted values of y2 to generate y3hat=max(0,y2hat)
3) use y3hat to estimate y1.

The problem is to obtain correct standard errors. Am I right to assume
Mark's suggestion will help me here? That is, use y3hat as an instrument
in step 3) as in

ivreg y1 (y3 = y3hat) x1

I would very much appreciate your advise, and, if possible, a reference.

Regards - Maarten

RE: st: Re: Endogenous right hand side variable

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