I've read the discussions about how to treat endogenous interaction terms when using an instrumental variable approach (2SLS) and followed the idea of Andy.
However, in my case there is just one instrument which is used for the endogenous independent variable (X) and the interaction term which consists of the endogenous independent variable (standardized) and one of my exogenous controls (also standardized)
Using Stata v15.1 this results in:
ivregress 2sls Y exog1 exog2 exog3 i.industry i.year (X Xegog1 = inst1 inst1exog1), vce (cluster isin)
However, following this approach my r-squared is going down dramatically (from >20% to less then 2%) just due to the "handmade" interaction-instrument.
Maybe there is an obvious answer to the declining R-squared or even some misspecification in terms of e.g. the robust standard-errors which might cause this? If someone could help this is highly appreciated.