st: re: ivreg2: No validity tests if just-identified?

[Kit Baum <baum@bc.edu>]

<>
Jennifer said

I worked quite carefully through the various options in ivreg2 and  
ivregress for testing (a) instrument validity (orthogonality etc) and  
(b) instrument strength (correlatedness with endogenous regressors).  
After doing so, I seem to be arriving at the conclusion that there is  
no way to test (a) if the model is just-identified, i.e. if I have the  
same number of excluded instruments as I have endogenous regressors).  
For example, the Sargan overid statistic, the C-statistic, the LR IV  
redundancy test statistic, etc. all don't get produced unless the  
model is overidentified. Is that true?! If yes, I would need to rely  
on persuasion using economic intuition to make my case that the  
instruments are valid, and there are no statistical tools to use?


Quite so. If you have only just enough instruments to identify the  
model, there are none available to test overidentifying restrictions,  
as there is no overid. The J statistic is by definition zero for all  
exactly identified models. On the other hand, if you have found some  
variables which you believe are appropriate instruments,  
transformations of them (powers, lags, interactions) should also be  
valid instruments, so it is not clear why you are stuck with exact ID.

Kit

Kit Baum   |   Boston College Economics & DIW Berlin   |   http://ideas.repec.org/e/pba1.html
                              An Introduction to Stata Programming   
|   http://www.stata-press.com/books/isp.html
   An Introduction to Modern Econometrics Using Stata  |   http://www.stata-press.com/books/imeus.html



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