Dear Joao Santos Silva and Tom Zylkin
Suppose we have a case of endogeneous regressor, the index of legal enforcement of property laws, hereafter denoted as (PLi,t). Further, lets suppose that, we are interested in estimating the impact of PLi,t on export flows of country i to country j at time t (Xij,t). It is imperative to mention that the index of PLi,t is time-variant measure of countrys' strength of property laws where higher (lower) indicate stronger (weaker) incidence of laws governing property. We control for multilateral resistance terms (MRTs) using Baier and Bergstrand (2009) transformation that uses first‐order log‐linear Taylor series expansion around a symmetric trade cost world. In a panel data context (like in our case), we use the recommendation in Baltagi et al. (2015) that applies Baier and Bergstrand (2009) method to panel data using period specific transformations.
However, due to endogeneity in PLi,t, the estimated parmateres based on PPML are biased and inconsistent. We use dummy variables for former British and French colonies as the instruments for PLi,t . That is:
BRITISH = 1 if country i is a British colony
=0, otherwise
similarily
FRENCH =1, if country i is a French colony
=0, otherwise
Many reserachers have argued that colonizers affect the formation and successive development of their colonies' institutions governing property laws (PLi,t). These two instruments (BRITISH and FRENCH) are highly correlated with PLi,t and affect export flows via PLi,t. It is to be noted that PLi,t is country-specific time-varying variable and its potential instruments BRITISH and FRENCH dummies are time-constant.
MY QUESTION:
Can we use the time-constant variables (dummies for former BRITISH and FRENCH colonies) as an instrument for time-varying index of property laws (PLi,t) and estimate the model using ivppml or ivpoisson in case of panel data?
If yes, are there any further recommendations i should be cautious about.
Please get back to me, I shall be very thankful to you.
(I am sorry for posting this longish query)
Thanks and regards,
(Ridwan)
References:
Baier, S. L. and J.H. Bergstrand. (2009). Bonus vetus ols: A simple method for approximating international trade-cost effects using the gravity equation. Journal of International Economics, 77(1):77-85.
Baltagi, B. H., P. H. Egger, and M. Pfaffermayr (2015). Panel data gravity models of international trade. In B.H. Baltagi (Ed.), The Oxford Handbook of Panel data, pp. 608-642. Oxford University Press
Suppose we have a case of endogeneous regressor, the index of legal enforcement of property laws, hereafter denoted as (PLi,t). Further, lets suppose that, we are interested in estimating the impact of PLi,t on export flows of country i to country j at time t (Xij,t). It is imperative to mention that the index of PLi,t is time-variant measure of countrys' strength of property laws where higher (lower) indicate stronger (weaker) incidence of laws governing property. We control for multilateral resistance terms (MRTs) using Baier and Bergstrand (2009) transformation that uses first‐order log‐linear Taylor series expansion around a symmetric trade cost world. In a panel data context (like in our case), we use the recommendation in Baltagi et al. (2015) that applies Baier and Bergstrand (2009) method to panel data using period specific transformations.
However, due to endogeneity in PLi,t, the estimated parmateres based on PPML are biased and inconsistent. We use dummy variables for former British and French colonies as the instruments for PLi,t . That is:
BRITISH = 1 if country i is a British colony
=0, otherwise
similarily
FRENCH =1, if country i is a French colony
=0, otherwise
Many reserachers have argued that colonizers affect the formation and successive development of their colonies' institutions governing property laws (PLi,t). These two instruments (BRITISH and FRENCH) are highly correlated with PLi,t and affect export flows via PLi,t. It is to be noted that PLi,t is country-specific time-varying variable and its potential instruments BRITISH and FRENCH dummies are time-constant.
MY QUESTION:
Can we use the time-constant variables (dummies for former BRITISH and FRENCH colonies) as an instrument for time-varying index of property laws (PLi,t) and estimate the model using ivppml or ivpoisson in case of panel data?
If yes, are there any further recommendations i should be cautious about.
Please get back to me, I shall be very thankful to you.
(I am sorry for posting this longish query)
Thanks and regards,
(Ridwan)
References:
Baier, S. L. and J.H. Bergstrand. (2009). Bonus vetus ols: A simple method for approximating international trade-cost effects using the gravity equation. Journal of International Economics, 77(1):77-85.
Baltagi, B. H., P. H. Egger, and M. Pfaffermayr (2015). Panel data gravity models of international trade. In B.H. Baltagi (Ed.), The Oxford Handbook of Panel data, pp. 608-642. Oxford University Press
Comment