Two Stage Least Squares (2SLS)

2SLS is a special case of instrumental variables estimation and Stata treats it as such. Stata performs 2SLS one equation at a time. Using reg to estimate each equation, Stata requires identification of the endogenous and exogenous variables for the model.

It is not necessary to estimate all equations at once.

Model:

y1 = b10 + b12 y2 + g21 x1 + e1

y2 = b20 + b21 y1 + g22 x2 + e2

Step 1. Write the structural model equation for eq. 1

reg y1 y2 x1

Step 2. Add a list of the exogenous variables in parentheses.

reg y1 y2 x1 (x1 x2)

Step 3. Repeat steps 1 & 2 for equation 2 to get estimates of the full model. The parenthetical exogenous variables will be the same list for each equation.

reg y2 y1 x2 (x1 x2)

Robust standard errors can be computed by adding ", robust" as a modifier in step 2.