Instrumental Variables And The Search For Identification: From Supply And Demand To Natural Experiments
Joshua D. Angrist
Massachusetts Institute of Technology (MIT) - Department of Economics; National Bureau of Economic Research (NBER); Institute for the Study of Labor (IZA)
Alan B. Krueger
Princeton University - Industrial Relations Section; National Bureau of Economic Research (NBER); Institute for the Study of Labor (IZA)
MIT Department of Economics Working Paper No. 01-33
The method of instrumental variables was first used in the 1920s to estimate supply and demand elasticities, and later used to correct for measurement error in single-equation models. Recently, instrumental variables have been widely used to reduce bias from omitted variables in estimates of causal relationships such as the effect of schooling on earnings. Intuitively, instrumental variables methods use only a portion of the variability in key variables to estimate the relationships of interest; if the instruments are valid, that portion is unrelated to the omitted variables. We discuss the mechanics of instrumental variables, and the qualities that make for a good instrument, devoting particular attention to instruments that are derived from "natural experiments." A key feature of the natural experiments approach is the transparency and refutability of identifying assumptions. We also discuss the use of instrumental variables in randomized experiments.
Number of Pages in PDF File: 32
Keywords: simultaneous equations, two-stage least squares, causal inference
JEL Classification: B23, C30, C20, J31working papers series
Date posted: September 20, 2001
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