Not sure why this didn't go through the first time, so if at first you don't succeed....
-----Original Message-----
From: Schaffer, Mark E
Sent: 21 November 2008 14:59
To: '[email protected]'
Subject: RE: Instrument validity
Filipa,
> -----Original Message-----
> From: [email protected]
> [mailto:[email protected]] On Behalf Of
> Filipa Aragão
> Sent: 21 November 2008 12:27
> To: [email protected]
> Subject: st: Instrument validity
>
> Hello,
> In Stata list
> (http://www.stata.com/statalist/archive/2006-06/msg00461.html) I found
> the folling:
> "Reverse causality in the first stage is irrelevant to consistency of
> LIML (or 2SLS etc.)."
> Does this mean the excluded instrument be correlated with the error in
> the first regression as long as it is not correlated with the error in
> the main equation (and is, of course, correlated with the endogenous
> variable)?
You mean, "Does this mean the excluded instrument CAN be correlated with the error in the first [stage] regression?" The answer is yes. The requirement of orthogonality applies only to the main equation.
This is because IV/2SLS and LIML are single-equation, "limited information" estimators. The "first-stage" equation is an auxiliary step but isn't part of the model - there are no model parameters there. If you want your first-stage equation to be interpreted as a model equation, then you are in the land of system estimation, 3SLS, FIML, etc., and you need to take a new set of baggage with you.
HTH.
Cheers,
Mark
Prof. Mark Schaffer
Director, CERT
Department of Economics
School of Management & Languages
Heriot-Watt University
Edinburgh EH14 4AS
tel +44-131-451-3494 / fax +44-131-451-3296
http://ideas.repec.org/e/psc51.html
>
> I am doing an ivreg2 model and my excluded instrument does not reject
> the null in the orthog() test but if, on a side, I do a
> Hausman test for
> its exogeneity in the first regression, I reject the null.
> Is the instrument valid anyway?
>
> Any help would be most appreciated. Thank you.
>
>
>
>
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