Monotone Instrumental Variables with an Application to the Returns to Schooling

47 Pages Posted: 19 Jun 2004 Last revised: 14 Aug 2010

See all articles by Charles F. Manski

Charles F. Manski

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

John V. Pepper

University of Virginia - Department of Economics

Date Written: February 1998

Abstract

Econometric analyses of treatment response commonly use instrumental variable (IV) assumptions to identify treatment effects. Yet the credibility of IV assumptions is often a matter of considerable disagreement, with much debate about whether some covariate is or is not a "valid instrument" in an application of interest. There is therefore good reason to consider weaker but more credible assumptions. assumptions. To this end, we introduce monotone instrumental variable (MIV) A particularly interesting special case of an MIV assumption is monotone treatment selection (MTS). IV and MIV assumptions may be imposed alone or in combination with other assumptions. We study the identifying power of MIV assumptions in three informational settings: MIV alone; MIV combined with the classical linear response assumption; MIV combined with the monotone treatment response (MTR) assumption. We apply the results to the problem of inference on the returns to schooling. We analyze wage data reported by white male respondents to the National Longitudinal Survey of Youth (NLSY) and use the respondent's AFQT score as an MIV. We find that this MIV assumption has little identifying power when imposed alone. However combining the MIV assumption with the MTR and MTS assumptions yields fairly tight bounds on two distinct measures of the returns to schooling.

Suggested Citation

Manski, Charles F. and Pepper, John V., Monotone Instrumental Variables with an Application to the Returns to Schooling (February 1998). NBER Working Paper No. t0224, Available at SSRN: https://ssrn.com/abstract=226634

Charles F. Manski (Contact Author)

Northwestern University - Department of Economics ( email )

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John V. Pepper

University of Virginia - Department of Economics ( email )

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