Re: st: How to run 2SLS twice

[Christopher Baum <kit.baum@bc.edu>]

On Feb 15, 2011, at 2:33 AM, Mauro wrote:

> I am estimating a reduced-form model in which I need to perform 2SLS twice.
> In particular, this is the empirical model:
> 1) y = a + b1 * x1 + b2 * z1 + e
> 2) z1 = c + b3 * x2 + b4 * z2 + u
> 3) z2 = d + b5 * x3 + v
> e, u and v are classical error terms; x1, x2 and x3 are exogenous vectors.
> Provided that x3 is a valid and informative instrument, what is the
> best way to estimate this in Stata? I can think of different ways:
> 1. Estimate equation 3). Then use the fitted values to estimate 2)
> (correcting for the standard errors). And then again use the fitted
> values to estimate 1) (again correcting for the standard errors).
> 2. Instead of running 3 regressions, I could run ivreg2 or ivregress
> 2sls for the first two regressions or the last two and in either case
> use the fitted values from the remaining equation (once again
> correcting for the standard errors). But in this case, which
> regressions is it better to estimate with ivreg2 or ivregress 2sls?
> 3. Last, use reg3 with the iv option.

How to run 2SLS twice? Don't.

Just estimate each equation with ivregress or ivreg2, using as excluded instruments all exogenous variables in the system. In the case of the third equation, you can estimate it with OLS or with "HOLS" (see the ivreg2 help file). No reason to do 2SLS 'by hand' here. 

Forget reg3 with iv option; it is just an inferior subset of what you could do with ivregress or ivreg2 (i.e. it only handles i.i.d. errors).

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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