st: instrumental variables

[Kit Baum <baum@bc.edu>]

George said

i am running instrumental variables estimations. y=f(X,W),  and W is  
endogenours,  so stage one becomes W=f(Z), and stage 2 becomes  y=f 
(X, Predicted W). My function is aproduction function with  
conventional inputs such as fertiliser, seeds, labour and then credit  
which is the (W).  Must the number of RHS variables  in stage one be  
the same number as RHS ones in stage two.

George should heed the Statalist FAQ and use informative subject  
headings on his postings.

He should read any textbook discussion of instrumental variables /  
two stage least squares. He might also find the Baum/Schaffer/ 
Stillman Stata Journal article useful; a working paper version can be  
accessed from
http://ideas.repec.org/a/tsj/stataj/v3y2003i1p1-31.html

One does not run the first stage and second stage as separate  
regressions. The number of included endogenous variables (one in his  
example, W) must be less than or equal to the number of excluded  
instruments. His mention of Z does not make clear whether that is a  
variable or a matrix of variables. If Z is a single variable, the  
equation would be exactly identified via the order condition. It  
would be preferable if the equation were overidentified---if Z  
contained more than one column---for then Sargan/Hansen tests for  
overidentifying restrictions could shed some light on the adequacy of  
the instruments.

Kit Baum, Boston College Economics
http://ideas.repec.org/e/pba1.html
An Introduction to Modern Econometrics Using Stata:
http://www.stata-press.com/books/imeus.html


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