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Understanding Instrumental Variables in Models with Essential Heterogeneity

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  • James J. Heckman

    (University of Chicago, University College Dublin, and the American Bar Foundation)

  • Sergio Urzua

    (University of Chicago)

  • Edward Vytlacil

    (Columbia University)

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. Copyright by the President and Fellows of Harvard College and the Massachusetts Institute of Technology.

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Bibliographic Info

Article provided by MIT Press in its journal The Review of Economics and Statistics.

Volume (Year): 88 (2006)
Issue (Month): 3 (August)
Pages: 389-432

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Handle: RePEc:tpr:restat:v:88:y:2006:i:3:p:389-432

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  1. Heckman, James J. & Lochner, Lance & Todd, Petra E., 2008. "Earnings Functions and Rates of Return," IZA Discussion Papers 3310, Institute for the Study of Labor (IZA).
  2. Flavio Cunha & James J. Heckman & Salvador Navarro, 2007. "The Identification And Economic Content Of Ordered Choice Models With Stochastic Thresholds," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 48(4), pages 1273-1309, November.
  3. Gordon B. Dahl, 2002. "Mobility and the Return to Education: Testing a Roy Model with Multiple Markets," Econometrica, Econometric Society, vol. 70(6), pages 2367-2420, November.
  4. Heckman, James J. & Navarro, Salvador, 2005. "Dynamic Discrete Choice and Dynamic Treatment Effects," IZA Discussion Papers 1790, Institute for the Study of Labor (IZA).
  5. James J. Heckman & Edward J. Vytlacil, 2000. "Local Instrumental Variables," NBER Technical Working Papers 0252, National Bureau of Economic Research, Inc.
  6. Guido W. Imbens, 2003. "Nonparametric Estimation of Average Treatment Effects under Exogeneity: A Review," NBER Technical Working Papers 0294, National Bureau of Economic Research, Inc.
  7. Joshua D. Angrist & Guido W. Imbens, 1995. "Identification and Estimation of Local Average Treatment Effects," NBER Technical Working Papers 0118, National Bureau of Economic Research, Inc.
  8. Yitzhaki, Shlomo, 1996. "On Using Linear Regressions in Welfare Economics," Journal of Business & Economic Statistics, American Statistical Association, vol. 14(4), pages 478-86, October.
  9. James J. Heckman & Vytlacil, Edward J., 2007. "Econometric Evaluation of Social Programs, Part II: Using the Marginal Treatment Effect to Organize Alternative Econometric Estimators to Evaluate Social Programs, and to Forecast their Effects in New," Handbook of Econometrics, in: J.J. Heckman & E.E. Leamer (ed.), Handbook of Econometrics, edition 1, volume 6, chapter 71 Elsevier.
  10. James Heckman & Justin L. Tobias & Edward Vytlacil, 2003. "Simple Estimators for Treatment Parameters in a Latent-Variable Framework," The Review of Economics and Statistics, MIT Press, vol. 85(3), pages 748-755, August.
  11. James J. Heckman & Vytlacil, Edward J., 2007. "Econometric Evaluation of Social Programs, Part I: Causal Models, Structural Models and Econometric Policy Evaluation," Handbook of Econometrics, in: J.J. Heckman & E.E. Leamer (ed.), Handbook of Econometrics, edition 1, volume 6, chapter 70 Elsevier.
  12. Edward Vytlacil, 2006. "A Note on Additive Separability and Latent Index Models of Binary Choice: Representation Results," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 68(4), pages 515-518, 08.
  13. Heckman, James J. & Robb, Richard Jr., 1985. "Alternative methods for evaluating the impact of interventions : An overview," Journal of Econometrics, Elsevier, vol. 30(1-2), pages 239-267.
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Blog mentions

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  1. Causality and Econometrics
    by Liam Delaney in Geary Behaviour Centre on 2009-04-28 19:19:00
  2. Marrying ‘randomistas’ with ‘regressionistas’: A review of Ravallion’s review of Poor Economics
    by Berk Ozler in Development Impact on 2012-04-26 07:50:16
  3. GMM and its application outside finance
    by Chris Auld in ChrisAuld.com on 2013-10-21 19:55:38
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