Instrumental variables (IV) are used for causal inference with observational data in the presence of endogeneity when standard regression methods yield biased and inconsistent estimates.

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Definition of validity of an instrumental variable

What does "validity of an instrument" mean exactly? In my econometrics course we have just defined instrument validity as $E[Z|u]=0$, where $Z$ is the instrumental variable and $u$ is the error term ...
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31 views

Double lasso variable selection

Currently I am learning about variable selection and lasso. I found the paper by Urminsky et al. "Using Double-Lasso Regression for Principled Variable Selection" (2016) which proposes a double lasso ...
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What is the relationship between LATE and TOT?

My understanding of LATE was that it was the effect of a treatment on individuals who were induced to be treated by the experiment. That is, the effect on compliers. My understanding of ...
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Why instrumental variables? Or: why not nonparametric regression?

Usually instrumental variables are introduced as a means to solve the problem $E(u|X)\neq 0$ in the model $Y = X'\beta + u$. This may happen if we omit important variables from the covariate vector ...
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1answer
29 views

Past values of Y correlated with future values of X1 in fixed effects model: use instrumental variable?

I am using panel data, running a fixed effects regression using xtreg Y X1 X2 X3, fe. I suspect, however, that past values of Y ...
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20 views

2SLS Regression, 1 Instrument effecting more than one explanatory variable?

So in my situation I have my dependent variable Log Income my Instrument Diabetes and my supposedly endogenous explanatory variable Reads Nutri. Where things start to get confusing for me is that ...
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65 views

How to interpret hausman test results?

I'm trying to do 2 stage least squares regression in python using the statsmodels library. ...
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7 views

Why I can not perform a Haussman test with pweight data?

I am studying the effect of mobile phone over household development (development as a dependent variable and mobile as a independent). I have a datas et of micro data that are weighed and i am working ...
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23 views

Sign of the correlation between endogenous/instrument variable and error term

I am doing my thesis using 2SLS, the IVs that I include to the model are not weak (F-stat>20), however, to prove that they are exogenous is a problem. I am going to use imperfect instrument approach ...
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16 views

Instrumental variable approach when having a binary variable in first and second stage [duplicate]

I am trying to estimate an IV model where my dependent variable is on the 0-1 scale, which is why I want a Logit estimator. Further, my independent variable, which is endogenous, as well as my ...
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25 views

2 stage least squares

I am looking into the effect of immigration on crime (using random effects panel data). there are 2 problems which 2 stage least squares should help with, firstly the endogeneity of immigration (as ...
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1answer
28 views

Control Function (CF) Approach with Nonlinear Functions of Endogenous Variables

I am estimating a model using the control function approach (also "2SRI"). My model includes an endogenous variable $y_2$, an instrument $z_2$ and an interaction of $y_2$ with an exogenous variable ...
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2answers
25 views

Formal test for exogeneity of instruments

Is there a way for me to formally test the exogeneity of my instruments? For instance, I have an endogenous variable, FDI, which I am instrumenting with "ease of doing business ratings," as a better ...
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1answer
22 views

validity of instrumental variables

How does one check the validity of instruments for a just-identified model, since the Sargan test can only be performed if the model is overidentified?
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1answer
49 views

Stata ivreg2 with binary endogenous variable interpretation

I have a binary endogenous variable (retirement) with a binary instrumental variable and the final outcome variable is also binary. I run ivreg2 in Stata. I know ...
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0answers
19 views

Highly correlated but weak instrument?

I have an instrument and an endogenous variable that correlated at a level of 0.42. This seems to me to be sufficiently strong, but whenever I perform any Wald statistics or weak instrument tests, the ...
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0answers
30 views

Fixed effects IV: exogenous covariates changing

Currently, I have 2 endogenous binary variables of interest (call these the VOIs) and 3 instrumental variables(all of which are also dummy variables), allowing me to use the overidentification test to ...
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0answers
21 views

Instrumental variable standard errors smaller than naive estimator standard errors

I recently estimated the following model using 2 different estimators, multinomial probit and instrumental variable (IV) multinomial probit: $Product_{i}=\beta_0 + ...
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0answers
23 views

How to interpret instrumental variables estimate if the identifying assumption is not satisfied?

Following the notation here, consider a model $$Y_{i} = \alpha + \beta X_{i} + \eta_{i}$$ where $X_{i}$ is the endogenous variable such that $Cov(X_{i},\eta_{i})\ne 0$. Suppose we have a binary ...
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2answers
56 views

Instrumental variable identification for price elasticity

I am working on a price elasticity problem and i am using Log-Log linear model. Below are the set of variables Dependent variable: logarithm of my quantity sold (LogQ) Independent variable: ...
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26 views

Do I have a problem of endogeneity?

I'm currently writing a dissertation on the impact of microfinance activity in a country on the poverty headcount ratio. It's a panel data model where i = country and t = year. I would like to ...
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1answer
86 views

Instrumental variables regression Vs Linear Regression for price elasticity

Based on comment here that What do "endogeneity" and "exogeneity" mean substantively? should we use linear regression or instrumental regression for price elasticity? As price and ...
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1answer
31 views

Instrument caused by dependent variable

Suppose that my instrument z is sufficiently correlated with the endogenous independent variable x in consideration (z->x). Now, I know that my dependent variable y is also a predictor of z (y->z) but ...
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1answer
31 views

Is it correct to use sampling weights for reducing multicollinearity in Probit?

I tried to estimate a probit model: $$y=b_1x_1+b_2x_2+b_3x_3,$$ where all variables are string and $x_1$ and $x_2$ are correlated. $x_1$ means GINI index and $x_2 = \text{self-employment rate}\cdot ...
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1answer
39 views

Appropriate Instruments

My model is: $$Y=\beta_0+\beta_1X_1+\beta_2X_2+\beta_3X_3+\beta_4X_4.$$ I want to check if 'weather' (not included in the above model) is an appropriate instrument. $X_1$ represents price. If I ...
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27 views

Is it valid to instrument endogenous variables one at a time?

I am a Stata user and am attempting to implement the IV Quantile regression method of Chernozhukov and Hansen (2008), for my model, which has two endogenous variables, call them "GD" and "ED". I am ...
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Simultaneous Equation Model (SEM): is the following system identified?

$Y_1 = \alpha_0 + \alpha_1 Y_2 + \alpha_2 Y_3 +\alpha_3 X_1 + \alpha_4 X_2 + u_1 \quad (1)$ $Y_2 = \beta_0 + \beta_1 Y_3 + \beta_2 X_2 + u_2 \quad (2)$ $Y_3 = \gamma_0 + \gamma_1 Y_2 + u_3 \quad ...
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42 views

Using an interaction term as the instrument variable

I recently came across Barro and Redlick QJE (2011) paper, "Macroeconomic Effects from Government Purchases and Taxes", in which the authors instrument for US defense spending with an interaction term ...
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1answer
47 views

Simultaneous equations with instrumental variables

I am trying to estimate the simultaneous equations model with instruments in STATA. I have two equations such as: ...
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1answer
87 views

What can go wrong using lagged terms as instrumental variables?

Can anybody give one example of when the set of all lagged $X$ can (or can't) be a good choice of IV's for $X_{t}$?
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25 views

Endogeneity in censored data

I estimate Instrumental Tobit using Newey’s (1987) minimum chi-squared estimator. My question is whether I can use lagged values of the endogeneous regressors as internal instruments for the ...
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0answers
31 views

Same instruments with different impact on multiple endogenous regressors

I have a regression containing 2 binary endogenous (X1 and X2) regressors. I have 2 instruments (Z1 and Z2), where both Z1 and Z2 have a significant positive effect on X1 and a significant negative ...
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1answer
55 views

Multiple exogenous IV 2sls in Stata [closed]

In my model I have two exogenous variables which I want to use as instruments. Can you please help me with Stata code for it? I assume it should be something like this: ...
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1answer
32 views

How do weak instruments violate full rank condition?

So I know that if the instruments $(Z_i)$ in 2SLS regression are weak i.e. $X_i$ and $Z_i$ are uncorrelated, then full rank condition for matrix $\Sigma_{ZX}=E[Z_iX_i]$ will fail to hold, but how can ...
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1answer
58 views

how to explain instrumental variables to a layman

I am giving a talk to a group that contains both quantitative and qualitative researchers, but most of the quants' understanding stops at crosstabs and regression. Does anyone have any ideas which ...
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46 views

Questions on IV (2sls) model with cross section data

I want to test cross sectional data with a household survey with 60k plus of respondents (however missing data result in overall data loss). The survey asks questions that answer either 0 or 1 or are ...
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25 views

Instrumental variable changes significance of other regressors

I have a linear regression:I am regressing price index and price volatility on some number of conflict events (dependent variable). Looking for a causal relationship between price index and number of ...
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191 views

Stata: How to carry out System-GMM estimation for Dynamic Panel Data

I am using Stata 13 to estimate a Dynamic Panel Data with the System GMM. I would like to use the second lags of variables (both dependent and independent variables) as instrument for the difference ...
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64 views

model estimation with feedback loop in variables

I have the following problem regarding fitting of a model where some variables can be biased so that their values are based on knowledge or at good guestimate of $Y$ in the past. In other words: some ...
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17 views

Causal inference designs and research questions

Consider the following two research questions from Heckman, 2006: P.1 Forecasting the impacts (constructing counterfactual states) of interventions implemented in one environment in other ...
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1answer
41 views

What is the result of violated exclusion restrictions?

I have a question regarding exclusion restrictions in instrumental variable design. If I have an instrumental variable, which is also somewhat related to the outcome, would that (and how) cause ...
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What does it mean when least squares and instrumental variables give similar results?

What can said when for some data set the result of a least squares regression is extremely close to the result of an instrumental variable regression?
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80 views

2sls IV with different unit of observation - Stata

I am doing some data analysis on Stata on a big sample and it turned out it might be useful to use an IV approach. My data are on two levels: individuals and groups. The group level is obtained ...
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1answer
84 views

IV regression, endogeniety and Wu-hausman question

We have the model: $HOURS = \beta_1 + \beta_2 ln(WAGE) + \beta_3EDUC+ \beta_4AGE + \beta_5KIDSL6 + \beta_6KIDSL618 + \beta_7NWIFEINC + e$ Does anyone know why using some variables as instruments ...
4
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1answer
41 views

Why do different instrumental variabless used for the same endogenous variable give different estimates?

Suppose I am interested in studying the effect of schooling on earnings. I have two valid IVs for schooling namely: distance of residence from school, and quarter of birth. I use each ...
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1answer
36 views

Weak first stage in 2SLS

I have a simple IV model with 1D variables: $N = \alpha_z + \beta_z Z + \epsilon_z$ $S = \alpha_s + \beta_s N + \epsilon_s$ $N$ is an integer, while $S$ is dummy. $Z$ is by construction ...
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1answer
98 views

2SLS for sales data (problem with IV)

I am given a task to perform an analysis on marketing data and to find out if the prices for the products and marketing budget are set correctly. In order to do it, I need to find a suitable model ...
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32 views

Consistency of GMM/LIML IV in presence of endogenous binary variable

From what I've read, 2SLS with 1st stage probit for the binary variable will result in inconsistency, this is the so-called "forbidden regression". This problem is adressable, but that's not what I'm ...
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1answer
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How do we know if using IV model is more efficient than OLS?

What are we looking for when we want to determine which model is most efficient? In my course slide they often discuss which model is most efficient, but I don't really know what they are looking and ...
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37 views

Quantile instrumental variable models (Chernozhukov and Hansen)

I am trying to implement a quantile IV model, and I must confess that I'm not fully familiar (read: comfortable) with the theory, although I have read the Chernozhukov and Hansen paper. However, the ...