Re: st: RE: Tricky IV-Problem and how do I correct Standard Errors in the Second Stage?

[Benjamin Niug <benjamin.niug@googlemail.com>]

Hi Mark & statausers,

Thanks for the answer - I see the point. Lets assume that I would not
account for fixed effects. Hence, I would have variation. How would I
be able to solve this problem? How would I correct the standard
errors.

Best Benjamin


2012/5/29 Schaffer, Mark E <M.E.Schaffer@hw.ac.uk>:
> Benjamin,
>
>> -----Original Message-----
>> From: owner-statalist@hsphsun2.harvard.edu
>> [mailto:owner-statalist@hsphsun2.harvard.edu] On Behalf Of
>> Benjamin Niug
>> Sent: 29 May 2012 10:37
>> To: statalist@hsphsun2.harvard.edu
>> Subject: st: Tricky IV-Problem and how do I correct Standard
>> Errors in the Second Stage?
>>
>> Hi Stata-users,
>>
>> Here is background information:
>>
>> - Dataset: I have a T=2 panel dataset with approximately 5000
>> observations.
>>
>> - Sampling: Observations are sampled across different localities (e.g.
>> 20 observation per locality).
>>
>> - Estimation Goal: I want to run a IV-regression accounting
>> for FE and clustering at the individual level.
>>
>> - I am using Stata 11.
>>
>> Here comes the issue:
>>
>> The explanatory variable that is endogenous (to be
>> instrumented) takes on the same values for observations in
>> the same locality. Hence, I want to run the first stage
>> regression using averages of exogenous variables per locality
>> as exogenous instrumental variables. Hence, there would some
>> further level of aggregation in the first stage (with
>> 5000/20=250 observations).
>>
>> Questions:
>> 1. Is there a Stata command that can estimate this somewhat
>> tricky Two-Stage Regression? (no Stata command that I am aware of).
>
> No, but it's not StataCorp's fault - it can't be done as specified.
>
> The problem is that the endogenous variable to be instrumented doesn't
> vary by locality.  Because it's locality-invariant, it will be absorbed
> by the fixed effects.  There will be nothing left to instrument.  Put
> another way, the FE estimator relies solely on within-locality
> variation.  There is no such variation in your endogenous regressor.
>
> Aside from finding a different explanatory variable that does have some
> within-locality variation, your only option is to use an estimator that
> exploits between-locality variation.  The between estimator does this,
> as does the random effects estimator.  Hybrid estimators are also
> possible (e.g., exploit only between variation for some regressors and
> only within variation for others), but you'd have to do those by hand.
>
> HTH,
> Mark
>
>> 2. If I run the first stage regression by hand: How do I
>> correct the standard errors in the second stage?
>>
>> Thanks in advance.
>>
>> Best regards,
>> Benjamin
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>
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