Plausibly Exogenous

Abstract:     
Instrumental variables (IVs) are widely used to identify effects in models with potentially endogenous explanatory variables. In many cases, the instrument exclusion restriction that underlies the validity of the usual IV inference holds only approximately; that is, the instruments are 'plausibly exogenous.' We introduce a method of relaxing the exclusion restriction and performing sensitivity analysis with respect to the degree of violation. This provides a practical tool for applied researchers who want to proceed with less than perfect instruments. We illustrate our approaches with empirical examples that examine the effect of 401(k) participation upon asset accumulation, demand for margarine, and returns-to-schooling.

Keywords: Instrumental Variables, Sensitivity Analysis, Priors

JEL Classifications: C3, C11

Working Paper Series