Hi,
I am running a regular OLS regression, but need to use instrumental
variables because of an endogenous variable. This variable is
continuous, but I am only able to think of two dummy variables to use as
instruments (it is very difficult to find instruments for this
variable). These seem to be good instruments because they are
theoretically exogenous, and they have a strong correlation with the
endogenous variable (F tests that these variables are equal to zero are
well above 10). The problem is that in the second stage regression the
coefficient of the instrumented variable is much higher than that of the
endogenous variable in the plain OLS regression. I wonder if you could
point me in the right direction. Specifically, are there problems with
using dummy variables as instruments, and do you know of a reason why
the second stage regression coefficients are so high? Is this normal?
I am sorry this is not a directly STATA related question, but I have
exhausted all of my other options, given my limited knowledge of
statistics.
Thank you,
Sandra
***********************************************
Sandra Mortal
Assistant Professor of Finance
516 Cornell Hall
University of Missouri
Columbia, MO 65211
Office: (573) 884-1684
Fax: (573) 884-6296
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