Dear stata users,
I am estimating a model
y = a + b1x1 + b2x1x2 + b3x3 + e
x1 and x3 are continuous variables. x2 is an indicator variable taking
the value 0 or 1. x1 is correlated with the error term e, thus I want
to estimate this model via two stage least squares. I have an
instrument z which is correlated with x1. How do I estimate this model
in Stata?
this does not work since I only have one instrument:
ivreg y (x1 x1x2 = z1) x3
but is it correct to estimate the first stage, then get the predicted
value x2hat and to multiply the predicted value with x2, and run a
regression with
y = a + b1x1hat + b2x1hatx2 + b3x3 + e
If this is correct, how do I get the proper standard errors?
Thanks in advance for your help,
-Javier
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