How do I correct for cross-sectional dependence (CSD) in a simultaneous equation model?

[Joseph Ogebe]

I have a panel data with over 80 firms and 26 years (period). After testing for cross-sectional dependence, I noticed the presence of cross-sectional dependence. I would like to know how to account for CSD in a simultaneous equation model (reg3)

[Phil Bromiley]

You'll increase your chances of a useful answer by following the FAQ on asking questions - provide Stata code in code delimiters, readable Stata output, and sample data using dataex.

Reg3 is not a panel estimator. I would start by adding year dummies to see if it fixes the problem. xtgls allows such controls, but doesn't handle your endogeneity. You could do this in sem, but it would be tricky to get it specified properly.

[Sarah S.]

Hi Joseph,

have you solved the issue please? I have same problem with cross sectional dependence.

best
sarah