<p>I am doing my Economics dissertation on the impact of competition law stringency (measured 0 to 1 on an index) on R&amp;D levels as a % of GDP. I have an unbalanced panel data set of countries from 1981- 2010. I am using a country- year fixed effects approach to account for any time- invariant country characteristics or time specific characteristics which don't vary by country. I am using the competition law index with 1 year lag.
However there of course could still be some omitted variable bias, so I intend on using an IV. I have considered a few options for this IV (based on available data), such as the budget allocated to each competition law regulator each year as a % of GDP, or the number of staff employed by each country's regulator each year. However I am unsure if these could meet the exclusion restriction.
I have found a similar paper which made use of &quot;Internal instruments&quot; which used lagged a independent variable as an instrument.
(https://repositorio.redinvestigadore...=1&amp;isAllowed=y). I didn't even know this was possible.</p>
<p>Both the budget as a % of GDP and the 5 period lag of the competition law index are valid in the first stage for me, however I am worried that they may not meet the exclusion restriction.</p>
<p>Any help would be greatly appreciated!</p>

CC BY-SA 4.0
2024-05-22T22:03:21.967Z
Do it .. see if the estimates make sense. In my experience which is from electricity demand modeling lagged dependent variables do not work as an instrument so I wouldn't expect it to actually work. However you should always aim to apply relevant methods and compare results, that can only strengthen your dissertation.
Jesper Hybel
CC BY-SA 4.0
2024-05-23T10:12:35.557Z
Thanks for the response! However I am talking about lagging my independent variable, not my dependent variable. e.g. If I used the level of competition law stringency 6 years ago as an instrument for the level of competition law stringency today. The exogeneity assumption would require that stringency 6 years ago has no effect on the error term of R&D as a % of GDP.
econstu123
CC BY-SA 4.0
2024-05-24T08:15:40.153Z
You could also use the lagged variable as your X directly
Papayapap
CC BY-SA 4.0
2024-05-28T13:18:29.583Z
What would this achieve?
econstu123
<econometrics><instrumental-variable>
Can I use lagged independent variable as an instrument?
econstu123
# Can I use lagged independent variable as an instrument?

(Asked by: username_0 on 2024-05-22)

I am doing my Economics dissertation on the impact of competition law stringency (measured 0 to 1 on an index) on R&D levels as a % of GDP. I have an unbalanced panel data set of countries from 1981- 2010. I am using a country- year fixed effects approach to account for any time- invariant country characteristics or time specific characteristics which don't vary by country. I am using the competition law index with 1 year lag.
However there of course could still be some omitted variable bias, so I intend on using an IV. I have considered a few options for this IV (based on available data), such as the budget allocated to each competition law regulator each year as a % of GDP, or the number of staff employed by each country's regulator each year. However I am unsure if these could meet the exclusion restriction.
I have found a similar paper which made use of "Internal instruments" which used lagged a independent variable as an instrument.
(https://repositorio.redinvestigadore...=1&isAllowed=y). I didn't even know this was possible.

Both the budget as a % of GDP and the 5 period lag of the competition law index are valid in the first stage for me, however I am worried that they may not meet the exclusion restriction.

Any help would be greatly appreciated!

**Tags:** econometrics, instrumental-variable

> **Comments:**
> **username_1**: Do it .. see if the estimates make sense. In my experience which is from electricity demand modeling lagged dependent variables do not work as an instrument so I wouldn't expect it to actually work. However you should always aim to apply relevant methods and compare results, that can only strengthen your dissertation.  
> **username_0**: Thanks for the response! However I am talking about lagging my independent variable, not my dependent variable. e.g. If I used the level of competition law stringency 6 years ago as an instrument for the level of competition law stringency today. The exogeneity assumption would require that stringency 6 years ago has no effect on the error term of R&D as a % of GDP.  
> **username_2**: You could also use the lagged variable as your X directly  
> **username_0**: What would this achieve?  

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## 0 answers

