st: Weighted 2SLS

[Daniel Brown <daniel.brown@lincoln.ox.ac.uk>]

Dear Statalist,

I have a question about the use of weights in 2SLS in a panel context, which I believe the xtivreg2 command supports.

I am employing a 2SLS instrumental variables analysis to a fixed effects regression where both my dependent variable and my instrument are themselves calculated as an average across underlying individuals - such that each observation for my dependent variable and instrument are of different reliability (where I know exactly how many observations have been used to calculate them, and so the weight I would like to attach to each observation - using the aweights command). Intuitively, if I were to attempt to employ fixed effects 2SLS, I thought that I would want to weight my first and second stage regression differently - my first stage regression taking into account the different reliability of observations for my instrument, and the second stage taking into account the different reliability of observations of my dependent variable. Econometrically, I was not sure whether applying weights in this way would undermine the role of the first stage in dividing up exogenous from pot!
 entially endogenous variation in my independent variable, or whether this approach is acceptable. I am also unsure as to whether the xtivreg2 command allows the use of a different weight for each stage, and if not then whether the weight command in xtivreg2 applies that weight to both stages of 2SLS.

Thanks,
Dan Brown
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