Instrumental variables (IV) are used for causal inference with observational data in the presence of endogeneity when standard regression methods yield biased and inconsistent estimates.

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Correlation with Lagged Variable

I am trying to predict the number of hospital visits in year 2. Lets call that NV2 I want to know if it is related to whether the person had visited the hospital in year one. That is a dummy ...
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Continuous Instrumental Variable?

In the classical Instrumental Variable model: $Y = \beta X + U \, $ an instrumental, binary variable ($Z$) is used to correct for confoundness between $Y$ and $U$ and must satisfy independence wrt ...
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54 views

Leaving out other endogenous variables when having one instrument

Let's suppose we have a regression $E(Y|X)$ with two known endogenous variables $X_1$ and $X_2$ and one instruments $Z_1$. My regression is: $y=\alpha+b_1 X_1+b_2 X_2 + \Gamma X_{exo}+u$ $Z_1$ seems ...
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What is the accurate first stage regression in Stata's 2LSL option in IVREG2?

What I want to find is if Stata stacks the variables, such as is in: $$ \begin{bmatrix} x_{1t} \\ x_{2t} \end{bmatrix}=\begin{bmatrix} b_{1} \\ a_{1} \end{bmatrix}+\begin{bmatrix} b_2 & b_3 & ...
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21 views

How are bayesian instrumental variables calculated?

So with regular frequentist statistics, I know that you can just regress on the first stage of two-stage least squares, get the predicted values, then plug them into the second stage. How does this ...
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15 views

Simultaneous Equation Modeling with interacted endogenous and exogenous variable in R or STATA

I want to build a simultaneous equation system (SEM) where the two endogenous variables are interacted with the same exogenous variables. For instance the following system: y1 = y2*x1 + z1 y2 = ...
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How to specify a multi-instrument 2SLS [migrated]

I'm looking for a compact way to specify a multi-instrument 2SLS in R. Imagine that there are four treatment categories (A, B, C, and D). There are two waves of measurement, Y_1 and Y_2. A ...
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27 views

Instrumental variable analysis after (propensity) matching

I am trying to replicate the methods used in this paper by Paul Rosenbaum and colleagues (Near-Far matching). I have been studying the methods in the referenced papers by Michael Baoicchi. My work ...
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55 views

2SLS Without Mixing The instruments

Suppose I have the following strucutural equation in time-series: $$y_t=\beta_0+\beta_1x_{1t}+\beta_2x_{t2}+\zeta w_t+\epsilon_t \quad (1)$$ In which both $x_{t1}$ and $x_{t2}$ are endogenous ...
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What can we say about models on observational data in the absence of instruments?

I've had in the past a number of questions asked of me relating to published papers in a number of areas where regressions (and related models, such as panel models or GLMs) are used on observational ...
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Quick questions about IV first stage F statistic

Suppose I have two different second stage outcome variables, Y1 and Y2. AND endogenous variable is X, and Z is an iv, and W is exogenous variables. First stage is reg of X on Z and W. And then ...
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Test on weak IV when first stage is nonlinear

When the first stage is linear, like the case of 2sls, the test of weak IV is straight forward, method like Stock and Yogo (2005) test are available in standard package command, like ...
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Instrumental variable regression related question

In Lubik and Schorfheide (2007), they are saying that The monetary policy rule can be represented as $$ R_{t}=X_{t}'M\beta_{1} + Y_{2}'\beta_{2}+\epsilon_{t}^{R} \hspace{1cm}(1) $$ where ...
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1answer
15 views

GMM-IV or 2TSLS for small sample?

I only have 23 obervations. I heard that GMM-IV is usually for large sample. Hence should I use GMM-IV or 2TSLS? Besides the sample size, what should I also consider when deciding between GMM-IV and ...
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24 views

Partially Endogenous Variables in a Panel Dataset

In the framework of a fixed effects model: Y$_{it}$ = X$_{it}$ + Z $_{it}$ + $\alpha$$_{i}$ + $\theta$$_{t}$ + $\epsilon$$_{it}$ what is the standard way to capture the unbiased effect of Z, in the ...
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44 views

Panel Data & IV

I have a panel data, and need to run an IV. I have only 1 endogenous variable. 1) Should I use a Two-stage least squares or a GMM? 2) I understand that GMM is only for dynamic panel data. What is a ...
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63 views

Regress residuals in second regression

I am wondering if anyone can point me to a paper/lecture notes on the rationale behind first running an OLS on a set of variables, and then in a second regression using the residuals of that ...
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Valid Instruments for an IV/2SLS Regression for house prices

I'm brand new here so my apologies if this is too general or has been answered elsewhere. I'm trying to estimate a model for the house prices that includes several endogenous regressors. For the sake ...
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1answer
20 views

Good tutorial for coding up estimator functions in R [closed]

I want to code up Lewbel's "special regressor" estimator in R, and I'd like to make it into something that others can use. I can write simple functions, but I don't fully understand the guts of even ...
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15 views

Using targeting (eligibility criterion) as an instrument

I want to know if it is economterically sound to use the targeting criterion (eligibility criterion) as an IV for a natural experiment. I have read a UCT program that uses a certain set of ...
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1answer
41 views

Intrumental variable for covariates

I am only interested in the causal and unbiased effect of x on y and I have used additional covariates in my model to control for other effects. I have a pretty decent instrument for my potentially ...
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45 views

What can go wrong if I use normal 2sls IV regression for count data?

My dependent variable is count data and for explanatory analysis we used a negative binomial regression. One variable is endogenous and we would like to instrument it. However, in Stata there is only ...
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1answer
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Changes in F-value of instrument

I am using 2SLS to estimate the effect of education on the probability that one works. In the first stage I regress education on my instrument and the other exogenous control variables. The same ...
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3answers
74 views

Is the key assumption for instrumental variables not testable?

The key assumption: the IV is independent of the response varible Y, cannot be tested empirically and can be argued only theoretically. Is this true? Why? And why is this a problem when we use ...
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Characterizing weak instruments bias with more than one endogenous variable

With a single endogenous variable, it is well known that a weak instrumental variable (or set of weak instrumental variables*) will bias 2SLS estimates toward OLS estimates. But how can one ...
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Endogeneity problem

I am doing a panel random effects model for estimating the relationship between remittances and poverty. My results are significant. But literature suggests there may be a problem of endogeneity or ...
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Large standard errors in IV regression [duplicate]

I am encountering very large standard errors of the endogenous regressor (bigger than the size of the coefficient) in the second step of my treatment-effects model (...
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Is it wrong to instrument panel data with an instrument without time series variation?

I have a balanced panel of individuals with an endogenous independent variable $x$. Fortunately I have an instrument $z$ that meets the exclusion restriction, but unfortunately this $z$ has no ...
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1answer
67 views

OLS versus IV regression results

I am doing an IV regression after OLS. From OLS I get significant results but I want to control for endogeneity and check reverse causality. So when I do IV, the sign of my main explanatory variable ...
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1answer
46 views

An example of Instrumental Variables use

In the following example of Greene's Econometric Analysis, he writes at a certain moment: «If the number of weeks worked, and the accepted wage offer are determined jointly, then $ln Wage_{it}$ and ...
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1answer
63 views

positive price coefficient after instrumentation in demand estimation

I need to complete an assignment for Industrial Organization course where one of the tasks is to estimate a discrete choice demand model. This means I basically need to estimate a linear model: ...
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41 views

Endogenous interactions in nonparametric instrumental variables

I'm interested in estimating a model along the lines of $$ pr(y==1) = g^{-1}\left(f(x_1,x_2)+X'\beta\right)+\epsilon $$ where $g$ is logit and $f$ is some smooth function. I'm using GAM's in ...
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112 views

High Collinearity between Instrument and Endogenous Variable in IV Estimation: Weak Instrument Problem?

I am estimating an IV Tobit model with one endogenous variable X and one instrument Z. $$Y=X\beta+ covariates +\epsilon$$ where $cov(X,\epsilon) \ne 0$ due to endogeneity of $X$. I am using IV ...
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1answer
45 views

Estimation of individual demand for gasoline

Quantity and price of gasoline are clearly endogenous because the quantity and price are determined by the supply and demand. However, the estimation of individual demand for gasoline is often done ...
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65 views

Choice of an instrument

In order to estimate the demand for electricity, I decided to instrument for monthly electricity consumption in a geographic area with the number of heating and cooling days. My thinking is that ...
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1answer
144 views

How to deal with weak instrument with GMM estimator?

I use the two-step system GMM estimator (panel data) and I get the following results: ...
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A proper use of the Cragg-Donald F-Statistic with more than one endogenous variable

I've read that the Cragg-Donald F-Statistic is similar to an F-test on the first-stage OLS regression when you have one endogenous variable. But with more than two endogenous variables, you should use ...
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26 views

Graph showing the first stage effect

I am using a 2SLS approach in order to estiamte the effect from increased education. I want to show the effects of the first stage graphically, ie I want to show that the instrument affects schooling ...
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1answer
139 views

2SLS probit vs LPM

I am using 2SLS to estimate the effect of education on the probability that one works. In the first stage I regress education on my instrument and the other exogenous control variables. The same ...
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1answer
261 views

2SLS - logit/probit in the second stage?

I just have a quick question: what if I'm interested in estimating a logit/probit model in the second stage, can I follow this two-step procedure by running OLS in the first stage (endogenous variable ...
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1answer
223 views

Mixing instruments in ivreg2 estimation in Stata

When using a 2sls estimation with ivreg2 with more than one endogenous variable, Stata necessarily -- as it seems to be -- instruments both endogenous variables ...
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Dynamic nonlinear IV question — how do you think about the exclusion restriction when you have multiple periods?

The setup is an experiment with a binomial outcome, repeated over two (or more) periods. In the first period, $X$ is randomly allocated. Of interest is its effect in predicting the probability of ...
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Is the application of the Frisch-Waugh-Lovell Theorem really necessary?

Suppose I have a model \begin{eqnarray} y = X_1 \beta + X_2 \gamma + \epsilon \\ X = Z \Pi + V \end{eqnarray} where $X_1$ is endogenous, Z are instruments, $X_2$ are exogenous. If I however include ...
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1answer
257 views

Why report r-squared in Instrumental Variables Estimation?

I mean the the R-squared calculated such as in $R^2=1-\frac{RSS}{TSS}$ when you use the $RSS$ from the original structural model and not recalculation that you should do in order to do an F test. With ...
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1answer
42 views

Is LIML consistent under heteroskedastic errors?

Please let the answer be yes. Suppose we have a model \begin{eqnarray} y= X \beta + \epsilon \\ X = Z \Pi + V \end{eqnarray} and we compute the LIML estimator \begin{eqnarray} \hat{\beta}_{LIML} = ...
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1answer
34 views

Deriving the common LIML estimator from first principles

David Hendry (1976) comments that deriving the LIML estimator is hard. I tend to agree. Guido Imbens has a nice expression here which reads \begin{eqnarray} \hat{\beta}_{LIML} = (X'(I - \lambda M_Z) ...
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Who to credit for “control functions” in econometrics?

The idea is pretty simple, and I think it came out sort of by-the-way in a paper about something else, so I'm having a hard time figuring out who to cite. Basically you've got a GLM (like a probit or ...
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1answer
47 views

Instrumental variables and noisy measurement

I am interested in the effect of the unemployment rate at the time of labor market entry ($u^{LME}$) on wages later in life (this is an old question, but I have a new data set). I'd like to run ...
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68 views

Combining propensity score matching with 2SLS

Inspired by the probit 2SLS estimation (see e.g. Wooldridge p.623, procedure 18.1 or check here probit two stage least squares), I am wondering if instead of running a Probit in the very first step, I ...
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21 views

IV or latent factor to process multiple measures?

I have several measures on different memory tests. I consider these measures may actually measure different aspects of memory functioning and every measure contains a measurement error. I am thinking ...