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  • ivprobit and firm FE?

    Hello all,

    I am estimating a probit model for a set of firms; I have a panel dataset of firms where they experience or do not experience a shock in each year. Technically, there is no estimator for a fixed effect model. So I do not include any firm FE in the model.

    Now, I have an IV for an endogenous variable, and I am using ivprobit. Should I include a firm FE in my ivprobit? If I don't, does that cause problems for exclusion restriction? What if Z(the IV) can affect the probability of S==1 through the firm FE(unobserved time-invariant heterogeneity)?

    This is the probit model:
    P(S=1)=a+b_1A_(i,t)+X_it+year FE+Industry FE+e

    This is the First stage:
    A_(i,t)=a'+yZ_(i,t)+X_it+year FE+Industry FE+e'
    Z is the IV for A.

    Thank you,
    Mahtab
    Last edited by Mahtab Karimi; Yesterday, 16:29.

  • #2
    1. there is now sufficient statistic for probit model, you're right, but there is one in logit. You could however try the Chamberlain-Mundlak device in probit

    2. linear probability model is also an option; the IPP does not apply there

    3. if the exclusion restriction only holds conditional on firm FE, this may make reviewers question the overall exogeneity of your instrument...

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