Weak Instruments in Instrumental Variables Regression: Theory and Practice

Posted: 4 Sep 2019

See all articles by Isaiah Andrews

Isaiah Andrews

Harvard Society of Fellows

James H. Stock

Harvard University - Department of Economics; National Bureau of Economic Research (NBER); Harvard University - Harvard Kennedy School (HKS)

Liyang Sun

Massachusetts Institute of Technology (MIT), Department of Economics, Students

Date Written: August 2019

Abstract

When instruments are weakly correlated with endogenous regressors, conventional methods for instrumental variables (IV) estimation and inference become unreliable. A large literature in econometrics has developed procedures for detecting weak instruments and constructing robust confidence sets, but many of the results in this literature are limited to settings with independent and homoskedastic data, while data encountered in practice frequently violate these assumptions. We review the literature on weak instruments in linear IV regression with an emphasis on results for nonhomoskedastic (heteroskedastic, serially correlated, or clustered) data. To assess the practical importance of weak instruments, we also report tabulations and simulations based on a survey of papers published in the from 2014 to 2018 that use IV. These results suggest that weak instruments remain an important issue for empirical practice, and that there are simple steps that researchers can take to better handle weak instruments in applications.

Suggested Citation

Andrews, Isaiah and Stock, James H. and Sun, Liyang, Weak Instruments in Instrumental Variables Regression: Theory and Practice (August 2019). Annual Review of Economics, Vol. 11, pp. 727-753, 2019. Available at SSRN: https://ssrn.com/abstract=3445885 or http://dx.doi.org/10.1146/annurev-economics-080218-025643

Isaiah Andrews

Harvard Society of Fellows ( email )

1875 Cambridge Street
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James H. Stock (Contact Author)

Harvard University - Department of Economics ( email )

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National Bureau of Economic Research (NBER)

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Harvard University - Harvard Kennedy School (HKS) ( email )

79 John F. Kennedy Street
Cambridge, MA 02138
United States

Liyang Sun

Massachusetts Institute of Technology (MIT), Department of Economics, Students ( email )

Cambridge, MA
United States

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