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This is a great example of the instrumental variable estimator:

https://www.youtube.com/watch?v=NLgB2WGGKUw

In our course however they stay really vague about examples, and to be honest, we really doubt it's use (certainly after reading some Taleb books).

Do you know other examples that can convince us of the usefulness of the model?

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    $\begingroup$ What does Taleb have to say about IV? $\endgroup$
    – dimitriy
    Commented Jun 11, 2014 at 18:09

1 Answer 1

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I think there are at least four main sources of instruments:

  1. Theory combined with clever data collection (Example: distance from job training center varies the cost of participation in training, and we're interested in the effect of training on wages)
  2. Exogenous variation in policies or program implementation, over time or across space (Example: Vietnam draft lottery, interested in the effect of military service on wages)
  3. Nature (stormy weather varies the supply of fish, which allows us to learn how price sensitive demand for fish sticks really is)
  4. Roll Your Own (Example: an experiment, or randomized encouragement to take up treatment if experiment is infeasible/unethical)
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  • $\begingroup$ Ok thank you! We have a hard time believing that lags of a veritable can serve as well as an instrumental variable. Probably I was a bit to quick mentioning Taleb in this regard. (I understood Taleb says that he doesn't believe the small samples we have do not capture at all the true distribution of what is happening, and are therefore not any good for prediction and causal effects. Lagged endogenous variables to help explain the causal effect is likewise a strange twist I do not really get...) $\endgroup$
    – Kasper
    Commented Jun 12, 2014 at 7:59
  • $\begingroup$ @Kasper I think that would make a nice separate question if you flesh it out a bit. $\endgroup$
    – dimitriy
    Commented Jun 13, 2014 at 17:33

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