Dear Rose,
Test the suspected endogenous variables one at a time for endogeneity
using the Durbin-Wu-Hausman test. You need to find instruments for
each endogenous variables that are:
1) Exogenous in the main equation (Exogenous, not external. See Deaton (2008))
2) Strongly correlated with the endogenous variable. Evaluate
instrument strength by comparing the Cragg-Donald-Wald F-statistic
with Stock and Yogo (2005) critical Values.
References
-----------------
a) Deaton, A. (2008). “Instruments of Development in the Tropics and
the Search for the Elusive Keys to Economic Development” NBER Working
Paper 14690
b) Stock, J.H. and M. Yogo (2005). Testing for Weak Instruments in
Linear IV Regression. MA: Cambridge University Press.
On 5/23/09, [email protected] <[email protected]> wrote:
> Dear all,
> I encountered a problem with endogeniety.Concretely, I have a equation
> below:
> y=al+a2x1+a3x2+a4z+e
> where z is exogenous definitely.However, I suspect whether x1 and x2 are
> endogenous.
> and there are two instrument variables, z1 for x1 and z2 for x2.
>
> In wooldridge book, there is an introduction about how to test whether one
> variable is endogenous.i.e,hausman test. First get the residual and then add
> the residual to the equation.If the p value of residual is significant, the
> suspect variable is endogenous.
>
> However, how to test with two suspect endogenous variables?
>
> Hope replies sincerely. Thank you in advance.
>
> Rose
>
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