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

Subject   Re: st: Re: other ways in dealing with endogeneity other than IV?
Date   Sat, 10 May 2008 14:41:59 +0200

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. 
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
>An Introduction to Modern Econometrics Using Stata:
>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

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