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Thread: 2SLS - endogeneity issue

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    2SLS - endogeneity issue




    I am running a regression on the relationship between aid inflows and investment levels in developing countries. One obvious other explanatory variable for investment is gross domestic product. My problem is that it is statistically related positively to investment levels and negatively to aid flows, that is to say richer countries get more investment but less aid.

    I am constructing a two stage least squares regression to control for the endogeneity of the aid variable. The first stage is to fix coefficients on a few variables to control for endogeneity of aid with relation to investment. I then regress aid on investment in the 2nd stage. I am unsure where to include GDP as a term in the identifying equation for aid or in the 2nd stage equation for investment. What do you think?

    Thank you very much!
    Last edited by Alex E; 05-03-2006 at 12:43 PM.

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    hi there,

    could you just clarify something please:

    what is your dependent variable (Y)? is it aid inflows or investment levels?

    are you doing multiple regression or just a few simple linear regression problems?

    i don't know what endogeneity is im afrard :-s

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