Understanding Instrumental Variables in Models with Essential Heterogeneity

111 Pages Posted: 15 Oct 2006

See all articles by James J. Heckman

James J. Heckman

University of Chicago - Department of Economics; National Bureau of Economic Research (NBER); American Bar Foundation; Institute for the Study of Labor (IZA); CESifo (Center for Economic Studies and Ifo Institute)

Edward Vytlacil

Yale University - Department of Economics; National Bureau of Economic Research (NBER)

Sergio Urzua

Northwestern University

Multiple version iconThere are 2 versions of this paper

Date Written: September 2006

Abstract

This paper examines the properties of instrumental variables (IV) applied to models with essential heterogeneity, that is, models where responses to interventions are heterogeneous and agents adopt treatments (participate in programs) with at least partial knowledge of their idiosyncratic response. We analyze two-outcome and multiple-outcome models including ordered and unordered choice models. We allow for transition-specific and general instruments. We generalize previous analyses by developing weights for treatment effects for general instruments. We develop a simple test for the presence of essential heterogeneity. We note the asymmetry of the model of essential heterogeneity: outcomes of choices are heterogeneous in a general way; choices are not. When both choices and outcomes are permitted to be symmetrically heterogeneous, the method of IV breaks down for estimating treatment parameters.

Keywords: unobserved heterogeneity, instrumental variables, treatment parameters, policy evaluation

JEL Classification: C31

Suggested Citation

Heckman, James J. and Vytlacil, Edward J. and Urzua, Sergio Samuel, Understanding Instrumental Variables in Models with Essential Heterogeneity (September 2006). IZA Discussion Paper No. 2320. Available at SSRN: https://ssrn.com/abstract=936692

James J. Heckman (Contact Author)

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Edward J. Vytlacil

Yale University - Department of Economics ( email )

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Sergio Samuel Urzua

Northwestern University ( email )

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Evanston, IL 60208
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