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st: FW: clustering in ivreg2

From   HUANG Sterling <>
To   "" <>
Subject   st: FW: clustering in ivreg2
Date   Mon, 28 Jan 2013 09:52:31 +0000

Dear Statalister,

I have problem with clustering option in ivreg2 and I hope to get a better understanding.

Here is the problem:
I am regressing firm level performance on variable X and X*Y(interaction between X and Y). X is endogenous, Y is exogenous and X*Y by construction is endogenous. I use instrument Z and Z*Y to instrument both X and X*Y. The problem is that X is at firm level while Z is at country level.

When I use ivreg2 with clustering option at country level, 
                Ivreg2 performance (X XY=Z ZY) control variables, cluster(country_code)

I keep getting following warning messages from STATA:

Warning: estimated covariance matrix of moment conditions not of full rank. standard errors and model tests should be interpreted with caution.
Possible causes: number of clusters insufficient to calculate robust covariance matrix singleton dummy variable (dummy with one 1 and N-1 0s or vice versa) partial option may address problem.

I also tried with partial(country_code) option in the ivreg2 command, and I get following error message.
Error: country_code listed in partial() but not in list of regressors.
invalid syntax

1. Does anyone know what these warning and error mean and how to fix it?
2. Can we do this manually in two stages: I estimate two first stage probit/logit regressions for X and X*Y using instrument Z and Z*Y  with clustering at country level and then use predicted value of X and X*Y in the second stage for performance regression? I tried, it went through, but I am not sure econometrically whether I can do this or not.



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