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Re: st: Question on Wooldridge's Procedure 18.1

From   Austin Nichols <[email protected]>
To   [email protected]
Subject   Re: st: Question on Wooldridge's Procedure 18.1
Date   Thu, 7 Jan 2010 10:22:39 -0500

vipul bhatt <[email protected]>:

No, you cannot--this is point of the sentence
"Note that the weak instrument diagnostics
will fail miserably using these

Your weak instrument diagnostics should come from straight IV, not
procedure 18.1--note that procedure 18.1 would go through if Z was
pure noise, and the predicted value of your endogenous variable could
be very highly correlated with the endogenous variable, leading you to
think you had very strong instruments.  This is also a problem using
predictions as excluded instruments in other settings (e.g. which uses predicted income as an
instrument for income), and then reporting the diagnostics as if the
predictions are actual measured data.

On Thu, Jan 7, 2010 at 10:13 AM, vipul bhatt <[email protected]> wrote:
> Hi,
> Thank you for these useful links. When I said Wooldrige mentions that we can ignore step 1 estimation I was actually referring to zeroth stage where I do probit of binary endogenous regressor on my instrument Z. Can we ignore insignificance of Z in this zeroth stage and simply focus on the validity of the predicted probablities (as these are my 'generated instrument') using output of ivreg2?
> Thank you,
> VB

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