Instrumental Variables and the Search for Identification: From Supply and Demand to Natural Experiments

32 Pages Posted: 20 Sep 2001

See all articles by Joshua D. Angrist

Joshua D. Angrist

Massachusetts Institute of Technology (MIT) - Department of Economics; National Bureau of Economic Research (NBER); IZA Institute of Labor Economics

Alan B. Krueger

Princeton University - Industrial Relations Section; National Bureau of Economic Research (NBER); IZA Institute of Labor Economics

Multiple version iconThere are 2 versions of this paper

Date Written: August 2001

Abstract

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.

Keywords: simultaneous equations, two-stage least squares, causal inference

JEL Classification: B23, C30, C20, J31

Suggested Citation

Angrist, Joshua and Krueger, Alan B., Instrumental Variables and the Search for Identification: From Supply and Demand to Natural Experiments (August 2001). MIT Department of Economics Working Paper No. 01-33. Available at SSRN: https://ssrn.com/abstract=281433 or http://dx.doi.org/10.2139/ssrn.281433

Joshua Angrist (Contact Author)

Massachusetts Institute of Technology (MIT) - Department of Economics ( email )

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IZA Institute of Labor Economics

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Alan B. Krueger

Princeton University - Industrial Relations Section ( email )

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National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

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