st: re: xtivreg2 - Incomplete computation of first stage regression

[Kit Baum <baum@bc.edu>]

<>
I expect that Mark Schaffer will chime in on this soon if he is online; I have brought it to his attention. It is a problem with Mark's -xtivreg2- (SSC), which is a 'wrapper' for our -ivreg2- (SSC). Although the xtivreg2 call in this example does not work for the lagged endogenous variable, the same call to -ivreg2- does:

webuse grunfeld, clear
// xtivreg2 invest (mvalue L.kstock = L.mvalue time), fe first

ivreg2 invest (mvalue L.kstock = L.mvalue time), first

suggesting that something is getting lost in the 'wrapper' logic.  An (admittedly inelegant) solution for the time being would be to just create the variable lkstock = L.kstock which should then work fine.

I agree that the code should gracefully handle this issue, no matter what is asked, but from an econometric standpoint, why would a lagged variable be correlated with the time-t error term? If there is some evidence (e.g., via a C-test with endog()) that this variable must be considered endogenous, I would suspect that the specification of the equation is faulty, as the computation of that Durbin-Wu-Hausman test has as its maintained hypothesis that the specification is correct.

Kit

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


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