Skip to main content

Questions tagged [two-stage-least-squares]

Two-stage least squares (2SLS) is a structural equation modeling technique that is used when the IV is correlated with the DV's errors.

Filter by
Sorted by
Tagged with
1 vote
1 answer
226 views

2sls asssumptions vs IV assumptions

Silly question but I was confused about the independence assumption for instrumental variables when they are used in 2SLS. Is it the case that the instrumental variable used in 2SLS only has to be as ...
6 votes
3 answers
132 views

Does an instrumental variable require independence between the instrument and treatment?

An instrumental variable Z is a legitimate instrument for T (the treatment) if the following hold: Z has a causal effect on Y that is fully mediated by T (i.e. no direct effect from Z to Y, and the ...
0 votes
0 answers
10 views

2SLS: does it just rescale the instrument variable?

I am investigating using instrument variables to correct for some known sources of measurement error in my data (measures that reflect mistakes/inconsistencies that we think directly affect our main ...
0 votes
0 answers
30 views

Do first and second stage regressions combined with fixed effects have to follow the same model?

I suspect reverse causality between Y and X1, therefore I'm applying an instrumental variable approach to panel data. My main regression consists of country- and year-fixed effects. Do I have to also ...
1 vote
1 answer
660 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 ...
4 votes
1 answer
96 views

Instrumental variable with measurement error

I have a question related to measurement error bias and the use of instrumental variables. Assume I have a continuous outcome variable $Y$ which is observed with no error and an endogenous (continuous)...
1 vote
3 answers
143 views

Weak instrument but 2nd stage significant

My IV's 1st stage F-stat is 4.7 (considered weak by the rule of thumb). The 2nd-stage regression coefficient is significant. I wonder what is the best way to interpret such observations.
2 votes
1 answer
306 views

Is the IV approach applicable to endogenous count variable in a linear regression?

In a linear regression setting, one of the regressors (independent variables) is endogeneous. However, strictly speaking it is not continouus, but a count variable. A continouus instrumental variable ...
0 votes
1 answer
442 views

Manually calculate robust standard errors of 2SLS regression

I used the "systemfit" function in R to estimate a 2SLS model as it allows to specify the first and second stage separately which is important for my estimation. I need robust standard ...
1 vote
1 answer
2k views

Bivariate probit versus 2SLS, contradictory results (sign)

I am currently facing puzzle and I hope some of you will be able to provide me some insights. I have this model: y: binary variable, x1: binary variable (endogenous), z: binary instrument, x2: ...
0 votes
1 answer
503 views

Standard errors of *partial* two stage least squares coefficients

Here partial 2SLS (I coined this term and found it descriptive) is the approach that SAS uses for 2SLS. Compared to "ordinary" 2SLS which in the first stage projects all explanatory variables $X$ onto ...
4 votes
2 answers
2k views

Why use two stage least squares for the instrumental variable estimator?

Following the rationale from Econometric Methods with Applications in Business and Economics by Heij et al., the instrumental variables estimator $b_{IV}$ for the linear regression model $y = X\beta ...
0 votes
0 answers
27 views

Partial derivative of interaction term with endogenous variable

I am trying to estimate the price elasticity based on a 2sls regression. The price in logarithmic form is treated as an endogenous variable. The price appears in an interaction term with income $\...
2 votes
0 answers
35 views

What is a 2-stage estimator?

I thought I would quickly find the answer to this, and maybe my capabilities of using the sites search function are very poor, but I didn't find an answer to the definition of what a 2-stage estimator ...
1 vote
1 answer
138 views

warning: variance matrix is nonsymmetric or highly singular [closed]

I get the above warning when running a 2SLS regression in Stata with robust standard errors. Specifically, I get this for the first stage, where in addition the first stage has no F-statistic, p-value,...
3 votes
1 answer
55 views

Temporal Order of Control Variables in 2SLS

I am analyzing pooled cross-sectional data with the instrumental variable being educational policy, the independent variable as high school graduation, and the dependent variable as subjective class ...
2 votes
1 answer
46 views

Estimating Complier Average Causal Effect (CACE) in a Field Experiment with One-Sided Noncompliance

I am working on a referee report for a field experiment focused on the employment process. The experiment investigates if including a video in job applications can reduce employment disadvantages for ...
1 vote
0 answers
18 views

2sls with interaction terms

I am running 2sls. Dependent variable - y Independent variable - x Instrumental variables - z1, z2, z3, z4 Interaction terms - xz1, xz2, xz3, xz4 Control variables Thus, the first stage of 2sls: x ...
1 vote
0 answers
13 views

How to evaluate the effect of each group in dummy D to endogenous variable X in 2SLS regression?

I have a question in terms of evaluating the effect of a dummy $D$ to endogenous variable $X$ in two-stage least squares (2SLS) regression. Suppose I have dependent variable $Y$, endogenous variable $...
1 vote
0 answers
33 views

Discrepancy in 2SLS Estimation Results

I've been exploring the 2SLS (Two-Stage Least Squares) estimation method to analyze a model involving endogeneity and instrumental variables. To better understand the process, I performed manual ...
0 votes
0 answers
35 views

The magnitude of an two-stages least squares coefficient is always larger than the ordinary least squares coefficient?

I have a hard time wrapping my head around this. I know that in case of measurement errors, the OLS estimate is biased downwards zero. Omitted variables can bias the explanatory variable of interest ...
3 votes
1 answer
2k 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?
0 votes
0 answers
71 views

Which model to choose (OLS, fixed-effects, 2SLS, random-effects) in R?

I want to perform an analysis on my panel data, but I have troubles finding the best model for my analysis. I performed an F-test to detect whether the pooled OLS or the fixed effects is more suitable....
0 votes
1 answer
34 views

IVs: would this rainfall specification cut it?

I need feedback to check whether rainfall is an appropriate instrumental variable. Before you boo me out, hear what I have to say. There are two countries: A and B. A and B are 2000 miles apart. My ...
0 votes
1 answer
148 views

2SLS with endogenous variable $X_1$ and interaction terms $X_1 \times X_2$, $X_2$ exogenous

I would like clarification on the correct way to set up the first-stage regression(s) for a hypothetical 2SLS regression. Say we have the following formula: \begin{align} y = x_1 + x_2 + x_1 \...
0 votes
1 answer
62 views

Instrumental variable identifiability in a linear setting in the presence of unobserved confounders

Long story short, I'm seeing in the literature that linear instrumental variables models are identifiable, even in the presence of unobserved confounders. The unobserved confounding aspect befuddles ...
3 votes
0 answers
473 views

When is an instrument too strong in the first stage?

Instrumental variable regression is estimated with ivreg in R. ivreg provides diagnostics with the ...
4 votes
1 answer
80 views

Can a variable be an instrument in the first stage and an exogenous covariate in the second stage of an 2SLS regression?

I have two equations of the form: $y = X\beta + Z\gamma + r\alpha +\epsilon_1$ (1) $r = Z\delta +\epsilon_2$ (2) The basic intuition here is $y$ is total cost data, $X$ is a matrix of variables ...
3 votes
2 answers
510 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") ...
1 vote
0 answers
81 views

Two questions about Interaction-terms in IV-regressions (2SLS) in R

I am doing a 2SLS-model in R with panel data (n=800), where I want to include an interaction-term as Instrumental-Variable in the first-stage model. My first question is: Does that even make sense? ...
0 votes
0 answers
300 views

Can I have an interaction-term between the predicted endogenous variable and other exogenous variables in the second stage Modell of a 2SLS?

I have a question regarding 2SLS and interaction-terms between the predicted endogenous variable and a set of exogenous variables (second stage). I want to calculate the effect of an endogenous ...
1 vote
1 answer
138 views

2SLS Regression, 1 Instrument effecting more than one explanatory variable?

So in my situation I have my dependent variable Log Income my Instrument Diabetes and my supposedly endogenous explanatory variable Reads Nutri. Where things start to get confusing for me is that ...
7 votes
2 answers
20k views

Weak first stage in 2SLS

I have a simple IV model with 1D variables: $N = \alpha_z + \beta_z Z + \epsilon_z$ $S = \alpha_s + \beta_s N + \epsilon_s$ $N$ is an integer, while $S$ is dummy. $Z$ is by construction ...
22 votes
3 answers
66k views

Two stage models: Difference between Heckman models (to deal with sample selection) and Instrumental variables (to deal with endogenity)

I am trying to get my head around the difference between sample selection and endogeneity and in turn how Heckman models (to deal with sample selection) differ from instrumental variable regressions (...
0 votes
0 answers
56 views

ECM long-run elasticity with one I(2) variable

I am estimating a 2SLS using a time series simultaneous equation ECM. The purpose is to estimate the price elasticity of electricity demand. Assume that both price and demand are I(1) variables, ...
1 vote
1 answer
96 views

Should I take logarithm of weights in WLS regressions

I am new here. I have a question regarding the anlaytical weights used in ivreghdfe or reghdfe regressions. People usually take aweights in STATA, my question is how we deal with the weight if the ...
2 votes
0 answers
49 views

Are standard errors from a second stage with OLS always underestimated? [duplicate]

I use Stata. I build on Standard errors of a two stage least squares regression, Stata to compute manually the standard errors for my model: I cannot use standard packages (ivreg2 etc.) as the second ...
1 vote
1 answer
66 views

What's the difference between exogenous and endogenous identifiers?

What's the difference? Exogenous vs. Endogenous identifiers.
2 votes
1 answer
1k views

How do weak instruments violate full rank condition?

So I know that if the instruments $(Z_i)$ in 2SLS regression are weak i.e. $X_i$ and $Z_i$ are uncorrelated, then full rank condition for matrix $\Sigma_{ZX}=E[Z_iX_i]$ will fail to hold, but how can ...
1 vote
0 answers
100 views

What is the 2SLS bias with a zero first stage in instrument analysis

I am trying to understand the impact in the IV estimate when zero coefficient is obtained in the first stage.
1 vote
0 answers
321 views

Can you use two stage least squares (instruments) on an endogenous categorical variable (Likert scale)?

I have an endogenous categorical variable (exlanatory variable) measured on a Likert scale (from 1-4) and I would like to instrument it via 2sls. I am wondering if this is a theoretically correct ...
1 vote
1 answer
125 views

Is my instrumental variable too noisy?

I have an instrument, that I want to use with IV 2SLS, to predict my endogenous variable. The scatter plot of my instrument against my endogenous variable looks like this. Using Stata's binscatter, I ...
1 vote
0 answers
299 views

2sls second stage statistically insignificant

i conducted a two stage least square regression. The coefficients of my first stage are statistically significant, but my second stage is not. How can i interpretate this? My F-Statistic of the second ...
6 votes
1 answer
719 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 ($\hat{x}$), ...
1 vote
1 answer
431 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 ...
3 votes
0 answers
82 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 ...
2 votes
0 answers
15 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 ...
2 votes
0 answers
273 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. ...
3 votes
1 answer
97 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 ...
4 votes
1 answer
1k views

how to explain instrumental variables to a layman

I am giving a talk to a group that contains both quantitative and qualitative researchers, but most of the quants' understanding stops at crosstabs and regression. Does anyone have any ideas which ...