st: Instrumentation strategy for interaction between endogenous and exogenous variables using ivreg2

[sudha mani <prof.smani@gmail.com>]

Dear Satalist users:

I am using ivreg2 to estimate the following model and would like
guidance on the instrumentation strategy for the interaction between
an endogenous and exogenous variable. The panel data includes
approximately 300 firms over 15 years. I am using Stata 11.2 for
Windows and I would like to estimate the following model:

Y=X1+X2+X3+X1X2+X1X3+X4+error
Where, X1 is endogenous.
X2 and X3 are exogenous
X1X2 and X1X3 are the interaction terms and are thus endogenous
X4 is a vector of control variables (included instruments).
Z1 and Z2 are valid excluded instruments for X1.

If I understand Wooldridge's approach correctly, then I can use the
following strategy to instrument the interaction term.

Reg X1 X2 X3 X4 Z1 Z2
Predict X1hat
g X1hatX2=X1hat*X2
g X1hatX3=X1hat*X3
Ivreg2 Y X2 X3 X4 (X1 X1X2 X1X3=Z1 Z2 X1hatX2 X1hatX3), gmm2s
cluster(firm) robust

Is the above a correct implementation of Wooldridge's approach in
Stata? Is the instrumentation strategy valid under conditions of
heteroskedasticity?

Thank you for the help!

Sudha

-- 
_____________
Dr. Sudha Mani
William Paterson University
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