@Wooldridge Hi Sir,
When we have two endogenous variables and two instrumental variables, one for each endogenous variable. Which regression method will be ideal to use, ivreg2 or Control function approach manually? To run the control function approach manually, I use the following steps-
My main model is
y1 = b0 + b1*x1 +b2*x2+ b3*(other Controls) +ui.
I assume xi and x2 are endogenous and I have z1 as an IV for x1 and z2 for x2.
Following Wooldridge(2015) paper, i first run
reg x1 z1 and other control variables, robust
From this model, I predict the residual, e1
I run the second equation
reg x2 z2 and other control variables, robust
From this model, i predict the residual e2
I use both the residuals in the final equation as additional regressors
The final equation is as follows
reg y1 x1 x2 e1 e2 and other control variables, robust
If the residuals turn out to be significant, then there is a problem of endogeneity. Are these steps correct ?
When we have two endogenous variables and two instrumental variables, one for each endogenous variable. Which regression method will be ideal to use, ivreg2 or Control function approach manually? To run the control function approach manually, I use the following steps-
My main model is
y1 = b0 + b1*x1 +b2*x2+ b3*(other Controls) +ui.
I assume xi and x2 are endogenous and I have z1 as an IV for x1 and z2 for x2.
Following Wooldridge(2015) paper, i first run
reg x1 z1 and other control variables, robust
From this model, I predict the residual, e1
I run the second equation
reg x2 z2 and other control variables, robust
From this model, i predict the residual e2
I use both the residuals in the final equation as additional regressors
The final equation is as follows
reg y1 x1 x2 e1 e2 and other control variables, robust
If the residuals turn out to be significant, then there is a problem of endogeneity. Are these steps correct ?
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