The Economics of Exclusion Restrictions in IV Models

15 Pages Posted: 27 Jul 2015

See all articles by Damon Jones

Damon Jones

University of Chicago - Irving B. Harris Graduate School of Public Policy Studies

Date Written: July 2015

Abstract

We explore a key underlying assumption, the exclusion restriction, commonly used in interpreting IV estimates in the presence of heterogenous treatment effects as a local average treatment effect (LATE). We show through a series of simple examples that in some commonly featured cases that this assumption is likely to be violated among inframarginal agents, i.e. the always- and never-takers. This violation of the exclusion restriction will generally confound the LATE interpretation of the associated IV results. We discuss potential adjustments to IV estimates in the presence of this bias.

Suggested Citation

Jones, Damon, The Economics of Exclusion Restrictions in IV Models (July 2015). NBER Working Paper No. w21391. Available at SSRN: https://ssrn.com/abstract=2636151

Damon Jones (Contact Author)

University of Chicago - Irving B. Harris Graduate School of Public Policy Studies ( email )

1155 East 60th Street
Chicago, IL 60637
United States

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