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From |
Tunga Kantarcı <[email protected]> |

To |
[email protected] |

Subject |
st: Endogeneity and instrument selection |

Date |
Wed, 3 Aug 2011 17:00:09 +0200 |

Hello, I am estimating an IV-FE model and puzzled with the results on the endogeneity test of the possibly endogenous covariates. I would like to summarize my model and for suggestions. Let us forget about the subscripts i and t defining individuals and time. My model is as follows: H = A(1) * X + A(2) * W1 + A(3) * W2 + U (Eq 1) I believe that W1 and W2 is endogenous and hence instrument it with the variables E1, E2, E3, and E4 as follows (for W1): W1 = B(1) * X + B(2) * E1 + B(3) * E2 + B(4) * E3 + B(5) * E4 + V (Eq 2) I find that E1, E2, E3, and E4 are in some cases individually but besides jointly "relevant" (with t or an F test) and "exogenous" (with respect to the overidentification test). Hence, the instruments are valid. I estimate the model with E1, E2, E3, and E4 as set above, and when I test to see if W is indeed "endogenous" I find that it is endogenous using the following command: xtivreg2 H (W1 W2 = E1 E2 E3 E4) X, fe robust cluster(HHIDPN) endog(W1 W2) Then I exclude E4 and I find that W is NOT endogenous anymore. This is what puzzles me and I cannot think of any reason why it would be the case. In particular, if I am not mistaken, the endogeneity test works as follows (simplified for W1): W1 can be correlated with U only if V is correlated with U because we know that "X, E1, E2, E3, E4" are uncorrelated with U. And then we test if V is significant in Equation 1. Given this, I cannot really think of any reason why W1 becomes exogenous when I drop E4 from the regression. I would appreciate your thoughts. * * For searches and help try: * http://www.stata.com/help.cgi?search * http://www.stata.com/support/statalist/faq * http://www.ats.ucla.edu/stat/stata/

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