Identification with Imperfect Instruments

43 Pages Posted: 27 Oct 2008 Last revised: 28 Oct 2008

See all articles by Aviv Nevo

Aviv Nevo

Northwestern University - Department of Economics; National Bureau of Economic Research (NBER)

Adam M. Rosen

University College London - Department of Economics

Date Written: October 2008

Abstract

Dealing with endogenous regressors is a central challenge of applied research. The standard solution is to use instrumental variables that are assumed to be uncorrelated with unobservables. We instead assume (i) the correlation between the instrument and the error term has the same sign as the correlation between the endogenous regressor and the error term, and (ii) that the instrument is less correlated with the error term than is the endogenous regressor. Using these assumptions, we derive analytic bounds for the parameters. We demonstrate the method in two applications.

Suggested Citation

Nevo, Aviv and Rosen, Adam M., Identification with Imperfect Instruments (October 2008). NBER Working Paper No. w14434. Available at SSRN: https://ssrn.com/abstract=1289668

Aviv Nevo (Contact Author)

Northwestern University - Department of Economics ( email )

2003 Sheridan Road
Evanston, IL 60208
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Adam M. Rosen

University College London - Department of Economics ( email )

Gower Street
London WC1E 6BT, WC1E 6BT
United Kingdom

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