Dear All,

I have a query related to a using a 3-dimensional panel in Stata which I am unable to figure out from Stata manual and previous threads. I have 2 donor countries j; 4 recipient countries i; and 5 years t.

My aim is to compare the role of corruption in foreign aid allocation decision of United States vs United Kingdom.

For this purpose, the dependent variable is the absolute amount of aid received by a recipient country i from donor j (i.e., U.S amd U.K) in year t. Corruption in a recipient country is my key explanatory variable. I am having some recipient specific control variables i.e., GDP and some donor-recipient specific control variables i.e., Trade between donor j and recipient i in a year. I intend to estimate the following equation:

Aidijt = beta0 + beta1 Corruptionit + beta2 Corruption*DonorDummy + beta3 GDPit + beta4 Tradejit + uijt

DonorDummy takes a value 1 for US and 0 for UK.

I am using the following code

Code:
regress Aid Corruption Corruption#DonorDummy GDP Trade, vce (cluster donorID recipientID)
I have the following 2 question in this regard:

Question 1: I am assuming that the coefficient beta2will indicate the influence of recipient’s corruption on aid allocation decisions of US in comparison with UK i.e., a positive significant coefficient will tell: U.S will give more aid to corrupt countries than U.K. Whereas, beta1, beta3, and beta4 will be same for both the donors.

Earlier studies on this topic have estimated separate equations as follows for each donor and through the following equations:

USAidit = beta0+ beta1Corruptionit+ beta2GDPit+ beta3Tradejit + uijt
UKAidit = beta0+ beta1Corruptionit+ beta2GDPit+ beta3Tradejit + uijt

They have then compared the magnitude of coefficient beta1 in the two equations to tell how different is US from UK in giving aid to corrupt countries.

But as per my understanding, separate equations will not serve the purpose of comparison and U.S.and UK’s aid should be estimated within one equation. I am wondering if my strategy of setting the 3-dimensional panel and interacting donor dummy with the key explanatory variable makes any sense in the way I have put my data in Stata and in general?


Question 2: How should I set my panel ID? I have tried to set it as follows:
  • egen panelid = group(Donor Recipient)
  • xtset panelid Year
I am a bit unsure if my strategy i.e., setting the panel and coefficient interpretation is appropriate or is there any alternate way of doing it in Stata.


Here is my example data:

Code:
* Example generated by -dataex-. To install: ssc install dataex
clear
input str5 Donor str8 Recipient float(Year GDP CorruoptionScore TradeShare Aid panelid DonorDummy)
"UK" "Kenya"    2010 40 3   70   87654 1 0
"UK" "Kenya"    2011 41 3   70   34567 1 0
"UK" "Kenya"    2012 43 3   73    4567 1 0
"UK" "Kenya"    2013 44 4   74    9875 1 0
"UK" "Kenya"    2014 49 3   77  675776 1 0
"UK" "Pakistan" 2010 60 5   33     767 2 0
"UK" "Pakistan" 2011 67 5   31 5435424 2 0
"UK" "Pakistan" 2012 68 6   35 1432345 2 0
"UK" "Pakistan" 2013 70 5   39  878854 2 0
"UK" "Pakistan" 2014 71 7   22    2345 2 0
"US" "Kenya"    2010 40 3   20    6789 3 1
"US" "Kenya"    2011 41 3   21    5658 3 1
"US" "Kenya"    2012 43 3   21    7678 3 1
"US" "Kenya"    2013 44 4   23    4324 3 1
"US" "Kenya"    2014 49 3   23   76468 3 1
"US" "Pakistan" 2010 60 5   10   98979 4 1
"US" "Pakistan" 2011 67 5   10 8687879 4 1
"US" "Pakistan" 2012 68 6   11   88768 4 1
"US" "Pakistan" 2013 70 5 12.5     687 4 1
"US" "Pakistan" 2014 71 7   11     345 4 1
end

Looking forward to your feedback.

Best regards,
Shazmeen Maroof.