Hello,

I tired IV(2SLS) regression with STATA, but I do not know whether what I do is right or not.

Please let me know better solutions.

Fixed effects: year fixed effect and id-code fixed effect
Clustering: standard errors clustered at the region and year levels.


egen id1= group(id)
egen code1 = group(code)
egen region1 = group(region)
egen double_fixed = group(id1 code1)
egen double_cluster = group(region1 year)

1)

vreghdfe Y X1 X2 X3 (endogenous variable=instrument variable), absorb(i.year id1 code1) cluster(region1 year)

2)

vreghdfe Y X1 X2 X3 (endogenous variable=instrument variable), absorb(i.year double_fixed) cluster(double_cluster)

3)

xtset double_fixed
xtreg endogeneous_variable = Instrument_variable X1 X2 X3 i.year, fe
predict endo_var_hat, xb
xtreg Y endo_var_hat X1 X2 X3 i.year, fe

4)

xtreg endogeneous_variable = Instrument_variable X1 X2 X3 i.year, fe vce(cluster double_cluster): error - panels are not nested within clusters

​​​​​​​Which one is correct? any better solution?