I'm estimating a production function with panel data region level. My dependent variable is regional GDP, as explanatory variables are the stock of capital, labor and a measure of human capital. Additionally, two measures of financial development was incorporated as an explanatory variable.
The literature tells me that it is very probable that my financial development indicators have the endogeneity problem, given that economic growth and financial development could be determining simultaneously.
One way to control the possible endogeneity would be expressing financial variables in lags. However, I'm not sure if I should express all the explanatory variables in the form of lags, or only the variables of financial development. That is, I should include the lagged capital stock, lagged work, lagged human capital and lagged financial development. I know it would make sense only express measures of financial development in lags; however, to do this, my results are inconsistent with expectations (the signs of the coefficients are contrary to the literature indicating).I get better results lagging all the explanatory variables.My panel is 15 transverse observations during 10 periods. Please, if anyone can give me any comments, we would greatly appreciate it.
