Plausibly Exogenous

48 Pages Posted: 18 May 2007 Last revised: 4 Aug 2008

Timothy G. Conley

University of Chicago - Booth School of Business

Christian Hansen

University of Chicago - Booth School of Business - Econometrics and Statistics

Peter E. Rossi

University of California, Los Angeles (UCLA) - Anderson School of Management

Date Written: July 31, 2008

Abstract

Instrumental variables (IVs) are widely used to identify effects in models with potentially endogenous explanatory variables. In many cases, the instrument exclusion restriction that underlies the validity of the usual IV inference holds only approximately; that is, the instruments are 'plausibly exogenous.' We introduce a method of relaxing the exclusion restriction and performing sensitivity analysis with respect to the degree of violation. This provides a practical tool for applied researchers who want to proceed with less than perfect instruments. We illustrate our approaches with empirical examples that examine the effect of 401(k) participation upon asset accumulation, demand for margarine, and returns-to-schooling.

Keywords: Instrumental Variables, Sensitivity Analysis, Priors

JEL Classification: C3, C11

Suggested Citation

Conley, Timothy G. and Hansen, Christian and Rossi , Peter E., Plausibly Exogenous (July 31, 2008). Available at SSRN: https://ssrn.com/abstract=987057 or http://dx.doi.org/10.2139/ssrn.987057

Timothy G. Conley

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-702-7281 (Phone)

Christian Hansen

University of Chicago - Booth School of Business - Econometrics and Statistics ( email )

Chicago, IL 60637
United States
773-834-1702 (Phone)

Peter E. Rossi (Contact Author)

University of California, Los Angeles (UCLA) - Anderson School of Management ( email )

110 Westwood Plaza
Los Angeles, CA 90095-1481
United States
773-294-8616 (Phone)

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