Very short question: are there tools (by preference in R or Stata) to solve a simultaneous equation model, without needing instrumental variables?
In my case, I would like to model irrigation and croptype. A farmer needs more or less irrigation depending on the croptype. However, the croptype that he chooses also depends on the possibility to irrigate.
Irrigation = climate + Croptype + ....... Croptype = geography + climate + Irrigation + ......
In my understanding, I need instruments for irrigation and croptype to solve this endogeneity problem (created by simultaneous equations). Is this correct, or can I also solve this without instruments?
The problem namely is that I do not find good instruments. There are several reasons for this:
- Croptype and irrigation are endogenous on there own because they are farm management variables. All variables on farm level are endogenous and have the same problem as the decisions are interdependent on each other.
- In the equations, there are a lot of exogenous variables such as climate, land value, geography, policy factors, cultural factors, economic factors... any search for additional variables seems to give high correlation problems with the other variables. Nevertheless, correlation with the endogenous variable stays Low.
- If this information might help: I have a short period of panel data but I would Prefer not to use them as I would like to examine the climate impact on the system.
Maybe as well important to know is that both irrigation and croptype are categorical variables.