Linearity in Instrumental Variables Estimation: Problems and Solutions
AbstractThe linear IV estimator, in which the dependent variable is a linear function of a potentially endogenous regressor, is a major workhorse in empirical economics. When this regressor takes on multiple values, the linear specification restricts the marginal effects to be constant across all margins. This paper investigates the problems caused by the linearity restriction in IV estimation, and discusses possible remedies. We first examine the biases due to nonlinearity in the commonly used tests for non-zero treatment effects, selection bias, and instrument validity. Next, we consider three applications where theory suggests a nonlinear relationship, yet previous research has used linear IV estimators. We find that relaxing the linearity restriction in the IV estimation changes the qualitative conclusions about the relevant economic theory and the effectiveness of different policies.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 5216.
Length: 55 pages
Date of creation: Sep 2010
Date of revision:
Contact details of provider:
Postal: IZA, P.O. Box 7240, D-53072 Bonn, Germany
Phone: +49 228 3894 223
Fax: +49 228 3894 180
Web page: http://www.iza.org
Postal: IZA, Margard Ody, P.O. Box 7240, D-53072 Bonn, Germany
Find related papers by JEL classification:
- C31 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models; Quantile Regressions; Social Interaction Models
- C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Semiparametric and Nonparametric Methods: General
This paper has been announced in the following NEP Reports:
- NEP-ALL-2010-10-09 (All new papers)
- NEP-ECM-2010-10-09 (Econometrics)
- NEP-MIC-2010-10-09 (Microeconomics)
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Løken, Katrine Vellesen & Mogstad, Magne & Wiswall, Matthew, 2011.
"What Linear Estimators Miss: The E ects of Family Income on Child Outcomes,"
Working Papers in Economics
02/11, University of Bergen, Department of Economics.
- Katrine V. L�ken & Magne Mogstad & Matthew Wiswall, 2012. "What Linear Estimators Miss: The Effects of Family Income on Child Outcomes," American Economic Journal: Applied Economics, American Economic Association, vol. 4(2), pages 1-35, April.
- Loken, Katrine Vellesen & Mogstad, Magne & Wiswall, Matthew, 2010. "What Linear Estimators Miss: Re-Examining the Effects of Family Income on Child Outcomes," IZA Discussion Papers 4971, Institute for the Study of Labor (IZA).
- Ann Huff Stevens & Marianne Page & Philip Oreopoulos, 2005.
"The Intergenerational Effects of Worker Displacement,"
521, University of California, Davis, Department of Economics.
- Philip Oreopoulos & Marianne Page & Ann Huff Stevens, 2008. "The Intergenerational Effects of Worker Displacement," Journal of Labor Economics, University of Chicago Press, vol. 26(3), pages 455-483, 07.
- Philip Oreopolous & Marianne Page & Ann Huff Stevens, 2005. "The Intergenerational Effects Of Worker Displacement," Working Papers id:183, eSocialSciences.
- Philip Oreopoulos & Marianne Page & Ann Huff Stevens, 2005. "The Intergenerational Effect of Worker Displacement," NBER Working Papers 11587, National Bureau of Economic Research, Inc.
- Julio Cáceres-Delpiano, 2006. "The Impacts of Family Size on Investment in Child Quality," Journal of Human Resources, University of Wisconsin Press, vol. 41(4).
- Lance Lochner & Enrico Moretti, 2011.
"Estimating and Testing Non-Linear Models Using Instrumental Variables,"
University of Western Ontario, CIBC Centre for Human Capital and Productivity Working Papers
20112, University of Western Ontario, CIBC Centre for Human Capital and Productivity.
- Lance Lochner & Enrico Moretti, 2011. "Estimating and Testing Non-Linear Models Using Instrumental Variables," NBER Working Papers 17039, National Bureau of Economic Research, Inc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Mark Fallak).
If references are entirely missing, you can add them using this form.