Manual 2SLS (Instrumental Variables)

In this week’s exercises, you will be using data from Michler et al. (2019), which studies the impact of conservation agriculture (CA) on crop yields in Zimbabwe. CA adoption (CA) is endogenous — farmers who adopt CA may differ systematically from those who don’t. In the paper, we instrument CA adoption using wardNGO, the number of other households in the same ward that received NGO support for CA.

• Load "$data/Michler_JEEM.dta" and keep only maize observations (keep if crop == 1).
• Run a naive OLS regression of lnyield on CA with the following controls: lnbasal lntop lnseed lnaream2 pdate pdate2 i.year, clustering standard errors at the rc level. Store the results as ols.
• Run the First Stage: Regress the endogenous variable (CA) on the instrument (wardNGO) and all the same controls (lnbasal lntop lnseed lnaream2 pdate pdate2 i.year), clustering at rc. Store as first.
• Generate the predicted fitted values from the first stage using predict CA_hat, xb.
• Run the Second Stage: Regress lnyield on CA_hat and the same controls, clustering at rc. Store as manual.

1. Export a two-column table comparing OLS and Manual 2SLS and put it in your Overleaf file:

* compare ols and manual 2sls
	esttab      ols manual using "$answ/13-iv-manual.tex", replace ///
	                b(3) se(3) ///
	                keep(CA) rename(CA_hat CA) nodepvars ///
	                star(* 0.10 ** 0.05 *** 0.01) ///
	                nomtitles fmt(0 3)) ///
	                stats(N r2, labels("Observations" "R-squared") /// 
	                noobs booktabs nonum collabels(none) ///
	                nobaselevels nogaps fragment label ///
	                prehead("\begin{tabular}{l*{2}{c}} " ///
	                    "\\[-1.8ex]\hline \hline \\[-1.8ex] " ///
	                    "& \multicolumn{1}{c}{OLS} & " ///
	                    "\multicolumn{1}{c}{Manual 2SLS} " ///
	                    "\\ \midrule") ///
	                postfoot("\hline \hline \\[-1.8ex] " ///
	                    "\multicolumn{3}{p{\linewidth}}{\small " ///
	                    "\noindent \textit{Note}: Dependent var. " ///
	                    "is log maize yield. Standard errors " ///
	                    "clustered at household level in " ///
	                    "parentheses. Manual 2SLS standard errors " ///
	                    "are incorrect. " ///
	                    "* p$<$0.10, ** p$<$0.05, *** p$<$0.01.} " ///
	                    "\end{tabular}")

2. Does the coefficient on CA increase or decrease when you move from OLS to the manual 2SLS? What does this tell you about the direction of the selection bias?