Hello,

We are running a model with a binary endogenous X variable and a continuous Y variable. We potentially want to instrument our X variable with an unordered categorical variable Z. The model runs fine on Stata and the first stage F-stats are also well above 10; so the instrument fairs well.

Is there any problem with using a categorical variable as an instrument? Since its an unordered categorical variable, we are not sure how to interpret the first stage coefficients of the impact of Z on X.

We would really appreciate any advice on this. Thank you.