Questions tagged [2sls]

Two-stage least squares is a regression technique from econometrics used in instrumental variables analysis.

Filter by
Sorted by
Tagged with
5 votes
1 answer
55 views

Prediction of the 1st stage in 2SLS not important?

My question was sparked by the discussion Why is the functional form of the 1st stage in 2SLS not important? I understand that in the first-stage we aim to predict our endogenous variable ($\hat{x}$), ...
user avatar
1 vote
1 answer
48 views

Why not simply use your instrumental variable as your independent variable?

I'm a little confused as to why we need to go through an entire two-stage regression process to capture the effect of our instrumental variable on our independent variable, and then only use this ...
user avatar
2 votes
0 answers
52 views

Why is ignoring prediction error not a concern in instrumental variables?

In his book, Statistical Rethinking (2nd edition, p. 137), Richard McElreath states that including parameters with unobserved values, such as residuals, and treating them as if they were perfectly ...
user avatar
2 votes
0 answers
10 views

Interpretation of bias with an endogenous variable

I am running an analysis of impacts of immigration on natives' votes to anti-immigration parties, across municipalities. The concern in this type of analysis is that location decisions of immigrants ...
user avatar
  • 21
0 votes
0 answers
10 views

Choosing between a set of potential instruments

I have a question regarding instrumental variable analysis/2SLS. I would like to estimate the following IV regression: $$Y_{ht} = 𝛼_{h} +𝛿_{𝑡} + 𝜷_𝟏(MM_{ht})+ 𝜷_𝟐(Shock_{ht−1})+𝝉(MM_{ht}∗...
user avatar
0 votes
0 answers
27 views

Two-stage least squares with no instruments

I'm reading a paper that estimates a model that resembles two-stage least squares, but they include the same controls in both stages and no instruments. What does this achieve? For example, we want to ...
user avatar
  • 1
2 votes
0 answers
37 views

Instrumental Variables: satisfying exclusion criterion with Covariates

I have encountered a situation wherein I am trying to ascertain the causal effect of X on Y through an IV approach in a cross-country panel study, but the exclusion restriction is not entirely valid. ...
user avatar
0 votes
0 answers
15 views

Instrumental variable approach to account for self-selection in some experimental groups

I have conducted an experiment in which participants were randomly assigned to six groups: Control group Control group with additional information about problem Pre-set treatment group Pre-set ...
user avatar
  • 23
0 votes
0 answers
19 views

What is an applicable instrument for my regression of demand for credit on interest rate?

I have a OLS regression for panel data with demand for credit as dependent and interest rate as independent. I'm worried about simultaneous causality and have decided on using an instrumental variable ...
user avatar
0 votes
0 answers
16 views

my 2sls answer and IVreg differ from each other

I have to run IVREg and 2sls manually to show my answer match but I don't know why my answer differ from each other? my model is ...
user avatar
  • 13
0 votes
0 answers
37 views

2 stage least squares, summing the first stage

I have a situation where the behavior of 1 group affects the welfare of another. (smokers affecting non-smokers through second-hand smoke). The 1st group is affected by a treatment (a tax is imposed ...
user avatar
  • 167
3 votes
1 answer
33 views

Identifiability of multivariate instrumental variable model

I'm interested in estimating the effects of $X_1$ and $X_2$ on $Y$ in the directed acyclic graph below. $U_1$ and $U_2$ are unobserved confounders. Based on Definition 7.4.1 on p. 248 of Causality ...
user avatar
  • 31
0 votes
0 answers
97 views

Computing Wu-Hausman test for endogeneity without ivreg()

I am trying to understand how to compute the Wu-Hausman test manually without the need to use ivreg() function (which typically provides the diagnostics in its summary). Consider the following lines ...
user avatar
0 votes
0 answers
31 views

What control variables should be included back in a second stage regression?

Suppose you want to estimate the average effect of $X_1$ on $Y$ using the model: $E(Y_i|X_i) = \beta_0 + \beta_1 X_{1i} + \beta_2 X_{2i} + \beta_3 X_{3i}$ If I understand correctly, there is an ...
user avatar
0 votes
0 answers
110 views

How to perform 2SLS for panel data in R?

I am interested in performing 2SLS for a panel dataset where each patient has multiple visits to the hospital. This is the link to a sample of my dataset. There are three main variables I am concerned ...
user avatar
0 votes
1 answer
60 views

Measuring the effect of a variable that moves through another variable

Model Let's say that I have a regression as follows: $$ Income_{ti} = B_0 + B_1Education_{ti} + B_2ControlA_{ti} + B_3ControlB_{ti} + u $$ Education is endogenous, and is in turn determined by: $$ ...
user avatar
  • 239
0 votes
0 answers
229 views

If I have two endogenous variables for which I each have an instrument, do I absolutely have to use both of them in both first stages?

I am estimating a model with two survey questions, which I expect to be endogenous by 2SLS: $$ Outcome_i = B_0 + B_1SurveyQuestionA_i + B_2SurveyQuestionB_i + B_3Control + u$$ I have an instrumental ...
user avatar
  • 239
2 votes
1 answer
179 views

Size of Complier Group (Instrumental Variables) - Mostly Harmless vs. Abadie Kappa

Focusing solely on the case with a binary endogenous explanatory variable $D$ and binary instrument $Z$ and control variables $X$, Angrist & Pischke 2009 ("Mostly Harmless Econometrics") ...
user avatar
  • 21
1 vote
0 answers
31 views

Log Likelihood for Two Stage Least Squares (for AIC or BIC)

I'm looking to use a number of information criteria (BIC, AIC, etc.) for Two Stage Least Squares. Of course all information criteria need a log likelihood - and I'm also aware that for a Log-...
user avatar
1 vote
0 answers
17 views

How to estimate 2SLS using ratio of covariance in a presence of a vector of exogenous variables?

I am trying to estimate 2SLS using some simulated data, just to understand the theory behind it. First, I did it with just one endogenous variable ($X$) and one instrument ($Z$). Supposing the classic ...
user avatar
1 vote
0 answers
266 views

Control Function (CF) / Two Stage Residual Inclusion (2SRI) - with an ordinal EEV - in Stata

I am mostly an R user. But since I have not found a way yet to reproduce generalised residuals in R (link), I am using Stata for ...
user avatar
  • 239
3 votes
0 answers
242 views

Generalised Residuals - Estimated value of the density at that point for observation $j$ $i$?

I am trying to write R code for the generalised residuals as described in Vella (1993) and also mentioned by Wooldridge (2014). Wooldridge suggests to use these ...
user avatar
  • 239
1 vote
0 answers
283 views

How to do a Control Function (CF) / Two Stage Residual Inclusion (2SRI) with an ordinal dependent variable in the first stage and a glm in the second

I am trying to use a Control Function (CF) / Two Stage Residual Inclusion (2SRI) approach, because the modeled relationship that I am trying to estimate is non-linear (my dependent variable has a ...
user avatar
  • 239
1 vote
1 answer
119 views

Why including extra instrument variables in 2SLS changes my regression coefficients?

For example, when I include $A_i$ as my first instrument variable, I got the causal parameter estimate $=0.0592$ and if I included one more IV, $B_i$, my causal parameter estimate changes to $0.0505$. ...
user avatar
  • 155
2 votes
0 answers
163 views

2SLS approach using lagged dependent variable as an instrument

I was wondering if the lagged dependent variable can be a valid instrument or not. In my data, policy intervention (x) is made depending on the outcome (y) in the past. (not depending on the effect (b)...
user avatar
0 votes
0 answers
26 views

What is 2SLS estimator with three instruments?

Given the following model, $$y_i = a + bx_i +e_i$$ It's known that $Cov(e, x ) \neq 0$, so we are going to use 2SLS method. We have three variables $v_1, v_2, v_3$. What is the formula for the slope $\...
user avatar
1 vote
0 answers
69 views

How to decide whether to use robust errors in 2sls estimation

For my data, I have run both the OLS and IV regression to investigate the effects of health on salary. The BP test showed Heteroskedasticity for the OLS error terms so I decided to run the OLS ...
user avatar
0 votes
0 answers
107 views

What is the effect of an omitted variable in the first stage of an IV/2SLS

Background Let me start with the fact that I read, this post, this post and this post. These questions deal with omitting exogenous variables from the main equation in the first stage. My question is ...
user avatar
  • 239
2 votes
0 answers
24 views

2stage (instrumental variable) analysis: is reverse causality in the first stage a problem? [duplicate]

For my research I am looking into the relationship between an outcome (Y) and a predictor (X) as follows: $$Y = X + e$$ where $e$ is the error term. Because there might be reverse causality I am ...
user avatar
  • 73
1 vote
0 answers
113 views

Two-stage residual inclusion or two-stage predictor substitution

I am a beginner on this site, so my apologies if I ask something incorrectly here. I have a panel dataset that looks like this: Ultimately, I need to estimate the predictors of patient quality of ...
user avatar
0 votes
0 answers
128 views

Testing for instrument validity using control function approach

Suppose we have a linear IV model with: $$ y_i=\beta x_i + \epsilon_i$$ $$x_i=\gamma z_i + u_i $$with $E(x_i \epsilon_i)\neq 0$ and $E(z_i \epsilon_i)=0$. Then we can estimate the residuals in the ...
user avatar
2 votes
1 answer
184 views

Can I use same Instrumental variable for two of my endogenous variables?

I have the following model : y= X1+x2+X1*X2+ other control both X1 and X2 are endogenous. Can I use the same instrument for both X1 and X2?
user avatar
3 votes
0 answers
105 views

2SLS with a boolean regressor

So, I have the following linear model: $$y = \alpha + \beta x + u$$ and $x \in \{0,1\}$, i.e. the variable $x$ is boolean. Moreover $x$ may be endogenous, and I have a set of instrumental variables $\...
user avatar
  • 111
0 votes
1 answer
150 views

How do you prove that an IV estimator is (in general) inconsistent if the first stage regression does not include a constant?

Given an equation $$ Y = \alpha + \beta X + u $$ where $X$ is an endogenous variable and $Z$ is a valid instrument for $X$. Then suppose that $$ X = \gamma + \pi Z + v $$ is the true data generating ...
user avatar
1 vote
2 answers
387 views

Can I use an exogenous variable from my model as an instrumental variable?

Can I use an exogenous variable specified in my model as an instrument for an endogenous one? It can be reasoned that there is a relationship between the two. My conjecture is this: Given that the ...
user avatar
  • 85
1 vote
0 answers
328 views

Which F statistic is generated in felm (R) and why does it differ from STATA (ivreghdfe)

I'm running 2sls and making sure that my results replicate in both stata and r. In r, using felm, my code is: ...
user avatar
2 votes
1 answer
929 views

Non-statistically significant effect of the instrument in the reduced form of the 2SLS

I am using a 2SLS, with two endogenous variables and two instruments. I conduct the Under- and the Weak-identification tests; results from these tests suggest that my instruments are not weak. ...
user avatar
  • 935
2 votes
1 answer
134 views

When endogenous variable is non-normally distributed

I am trying to fit an IV probit model with my dependent variable being binary. However, my endogenous variable is a "ratio" variable, which is not normally distributed, thereby preventing me ...
user avatar
1 vote
1 answer
349 views

Why is the Wald Estimator equal to LATE (binary instrument)?

In Mostly Harmless Econometrics, Equation (4.1.12) states that in IV setting with binary instrument $Z$, treatment $D$, and potential outcomes $Y_1,Y_0$ for $Y$, then $$E[Y_1-Y_0|D_1 = 1, D_{0} = 0] =...
user avatar
  • 11
0 votes
1 answer
169 views

Test for weak instruments in Stata when using VCE robust [closed]

does anyone know how I can test for weak instruments (one instrument, just identified model) after 2SLS regression in Stata when using robust standard errors (VCE robust)?
user avatar
  • 627
3 votes
1 answer
213 views

Using residuals in 2SLS regression to remove reverse causality

Someone suggested the following idea to me to control for reverse causality. Suppose we want to test for the effect of $X$ on $Y$ in a panel data set, but we suspect that there is reverse causality. ...
user avatar
  • 675
3 votes
1 answer
2k views

A 2SLS when the instrumented variable has two interactions in the model

I am using ivreg and ivmodel in R to apply a 2SLS. I would like to instrument one variable, ...
user avatar
  • 239
2 votes
1 answer
152 views

Inconsistency of Forbidden Regression Estimator

I am trying to prove the inconsistency of the estimator of the in the following model: 1st stage: 2nd stage: When the population model is and . I know this is a forbidden regression because ...
user avatar
  • 143
0 votes
0 answers
21 views

Addressing Near Perfect Correlations In Highly Competitive Commodity Markets

I am working on an analysis for a highly competitive agriculture market. I'm looking at county elevators in Iowa where competitors set their price for tomorrow's corn "ask" the evening before, but ...
user avatar
0 votes
1 answer
855 views

Missing R squared value from STATA output, what does that mean?

I ran a 2SLS regression in STATA, and there is no R squared value given in the output (only a dot where the value should be). What could this be interpreted as? Is it missing because it may be a ...
user avatar
  • 157
1 vote
0 answers
91 views

How do I tell if my Instrument is valid?

I have the following structural model (similar) which I wish to estimate $$ Y_t = \beta_0 + \beta_1 X_t + \epsilon_t $$ but I'm aware that $X_t$ is endogenous or equivalently, $E[X_t\epsilon_t]\ne 0$....
user avatar
  • 83
1 vote
0 answers
143 views

Why do estimates differ so much between Instrumental Variable (ivreg) vs 2SLS (lm)?

I am working with some messy pilot data to figure out whether Instrumental Variable analysis will help interpret the results of a randomized controlled trial I am preparing. Treatment compliance in ...
user avatar
  • 73
11 votes
0 answers
853 views

Instrumental variables with interactions between endogenous variables

I have two endogenous variables $x_1$ and $x_2$ and am trying to estimate the following model: $$y = \theta_0 + \theta_1 x_1 + \theta_2 x_2 + \theta_{12} x_{12}$$ where $x_{12} = x_1\times x_2$. I'm ...
user avatar
  • 161
1 vote
1 answer
3k views

What control variables do we need for IV regression?

I am running and IV regression and I need help on what control variables to include in the IV regression. I believe that I have to control for potential variable that are correlated with both the ...
user avatar
  • 39
0 votes
0 answers
35 views

Implementation of 2SLS in regression with AR errors?

Consider the following simple example: $Y_t=\beta X_{t-1}+\varepsilon_t$ $X_t=\gamma Y_t + Z_t +u$, where $\varepsilon_t=\alpha\varepsilon_{t-1}+\eta$, and $E[Z_t\varepsilon_t']=E[uu']=E[\eta\...
user avatar
  • 21