Identifying Treatment Effects in the Presence of Confounded Types

48 Pages Posted: 6 Nov 2017 Last revised: 8 Nov 2019

See all articles by Désiré Kédagni

Désiré Kédagni

Iowa State University - Department of Economics

Date Written: November 2, 2017

Abstract

In this paper, I consider identification of treatment effects when the treatment is endogenous. The use of instrumental variables is a popular solution to deal with endogeneity, but this may give misleading answers when the instrument is invalid. I show that when an (unobserved) instrument is invalid due to correlation with the first stage unobserved heterogeneity, a proxy for the instrument helps partially identify not only the local average treatment effect, but also the entire potential outcomes distributions for compliers. I exploit the fact that the distribution of the observed outcome in each group defined by the treatment and the instrument is a mixture of the distributions of interest. I write the identified set in the form of conditional moment inequalities, and provide an easily implementable inference procedure. Under some tail restrictions, the potential outcomes distributions are point-identified for compliers. Finally, I illustrate my methodology on data from the National Longitudinal Survey of Young Men to estimate returns to college using college proximity as a proxy for the instrument low college cost. I find that a college degree increases the average hourly wage of the compliers by 17-35%.

Keywords: Potential outcome, instrumental variable, LATE, compliers, mixture models

JEL Classification: C14, C21, C25, C26

Suggested Citation

Kédagni, Désiré, Identifying Treatment Effects in the Presence of Confounded Types (November 2, 2017). Available at SSRN: https://ssrn.com/abstract=3064230 or http://dx.doi.org/10.2139/ssrn.3064230

Désiré Kédagni (Contact Author)

Iowa State University - Department of Economics ( email )

260 Heady Hall
Ames, IA 50011
United States

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