RE: st: Tests of overidentifying restrictions with -ivregress-

["Santos Silva, Joao M C" <jmcss@essex.ac.uk>]

Dear All,

I have been following this discussion with interest and I think people tend to
read too much into the results of the overid test. Passing the test gives no
information on whether the instruments identify the parameters of interest.
I guess this is now a well-known results, but we provide examples in this
short paper:  http://bit.ly/18gLPeL

Hope this helps,

Joao

> Dear all,
> I need your help for interpreting some postestimation results of my
> instrumental variables model. I am using Stata 12.0 and the command -
> ivregress-. The sintax is the following:
> 
> ivregress 2sls dep (endo endoXexo = instrument1 instrument2 instrument1#exo
> instrument2#exo) exo exo1 exo2 exo3, first
> 
> where dep is the dependent variable, endo is the endogenous regressor, exo is
> an exogenous regressor that I want to interact with the endogenous one, and
> exo1, exo2, exo3 are other exogenous regressors.
> After running this model I type -estat overid- and I obtain this result:
> 
> 
> Tests of overidentifying restrictions:
> 
> Sargan (score) chi2(2) =  .311939  (p = 0.8556)
> Basmann chi2(2)        =  .310601  (p = 0.8562)
> 
> 
> This should mean that my instruments are not correlated with the error of the
> main regression and therefore they are valid. Now, I want to add an other
> exogenous regressor in the main regression, and for this reason I write:
> 
> ivregress 2sls dep (endo endoXexo = instrument1 instrument2 instrument1#exo
> instrument2#exo) exo exo1 exo2 exo3 exo4, first
> 
> where exo4 is the new variable that I add to the model. The effect of this
> new factor on the dependent variable is statistically significant, and it
> also considerably  reduces the effect of endo. However, when I type again -
> estat overid-  the result is the following:
> 
> Tests of overidentifying restrictions:
> 
> Sargan (score) chi2(2) =  14.1205  (p = 0.0009)
> Basmann chi2(2)        =  14.0913  (p = 0.0009)
> 
> 
> This means that my instruments are not valid anymore. How it can be possible?
> The error term of the first model should incorporate also the effect of exo4.
> As far as I am aware, if my instruments are not correlated to it (the error
> term), they can not be correlated with the error term of the second model. I
> don't know how to interpret these results.....
> Any idea or suggestion?
> Thank you very much for help
> Roberto
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