Identification and Extrapolation of Causal Effects with Instrumental Variables

Posted: 7 Sep 2018

See all articles by Magne Mogstad

Magne Mogstad

Statistics Norway; IZA Institute of Labor Economics

Alexander Torgovitsky

University of Chicago

Date Written: August 2018

Abstract

Instrumental variables (IV) are widely used in economics to address selection on unobservables. Standard IV methods produce estimates of causal effects that are specific to individuals whose behavior can be manipulated by the instrument at hand. In many cases, these individuals are not the same as those who would be induced to treatment by an intervention or policy of interest to the researcher. The average causal effect for the two groups can differ significantly if the effect of the treatment varies systematically with unobserved factors that are correlated with treatment choice. We review the implications of this type of unobserved heterogeneity for the interpretation of standard IV methods and for their relevance to policy evaluation. We argue that making inferences about policy-relevant parameters typically requires extrapolating from the individuals affected by the instrument to the individuals who would be induced to treatment by the policy under consideration. We discuss a variety of alternatives to standard IV methods that can be used to rigorously perform this extrapolation. We show that many of these approaches can be nested as special cases of a general framework that embraces the possibility of partial identification.

Suggested Citation

Mogstad, Magne and Torgovitsky, Alexander, Identification and Extrapolation of Causal Effects with Instrumental Variables (August 2018). Annual Review of Economics, Vol. 10, pp. 577-613, 2018. Available at SSRN: https://ssrn.com/abstract=3245115 or http://dx.doi.org/10.1146/annurev-economics-101617-041813

Magne Mogstad (Contact Author)

Statistics Norway ( email )

N-0033 Oslo
Norway

IZA Institute of Labor Economics

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

Alexander Torgovitsky

University of Chicago ( email )

1101 East 58th Street
Chicago, IL 60637
United States

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