st: FW: clustering in ivreg2

[HUANG Sterling <Sterling.HUANG@insead.edu>]

Dear Statalister,

I have problem with clustering option in ivreg2 and I hope to get a better understanding.

Here is the problem:
I am regressing firm level performance on variable X and X*Y(interaction between X and Y). X is endogenous, Y is exogenous and X*Y by construction is endogenous. I use instrument Z and Z*Y to instrument both X and X*Y. The problem is that X is at firm level while Z is at country level.

When I use ivreg2 with clustering option at country level, 
                Ivreg2 performance (X XY=Z ZY) control variables, cluster(country_code)

I keep getting following warning messages from STATA:

Warning: estimated covariance matrix of moment conditions not of full rank. standard errors and model tests should be interpreted with caution.
Possible causes: number of clusters insufficient to calculate robust covariance matrix singleton dummy variable (dummy with one 1 and N-1 0s or vice versa) partial option may address problem.

I also tried with partial(country_code) option in the ivreg2 command, and I get following error message.
Error: country_code listed in partial() but not in list of regressors.
invalid syntax

Questions:
1. Does anyone know what these warning and error mean and how to fix it?
2. Can we do this manually in two stages: I estimate two first stage probit/logit regressions for X and X*Y using instrument Z and Z*Y  with clustering at country level and then use predicted value of X and X*Y in the second stage for performance regression? I tried, it went through, but I am not sure econometrically whether I can do this or not.

Best,

Sterling



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