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Instrumental Variables: A Cautionary Tale

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James J. Heckman

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Abstract

This paper considers the use of instrumental variables to estimate the mean effect of treatment on the treated. It reviews previous work on this topic by Heckman and Robb (1985, 1986) and demonstrates that (a) unless the effect of treatment is the same for everyone (conditional on observables), or (b) treatment effects are variable across persons but the person-specific component of the variability not forecastable by observables does not determine participation in the program, widely-used instrumental variable methods produce inconsistent estimators of the parameter of interest. Neither assumption is very palatable. The first assumes a homogeneity that is implausible. The second assumes either very rich data available to the econometrician or that the persons being studied either do not have better information than the econometrician or that they do not use it. Instrumental variable methods do not provide a general solution to the evaluation problem.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Technical Working Papers with number 0185.

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Date of creation: Sep 1995
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Handle: RePEc:nbr:nberte:0185

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Find related papers by JEL classification:
C14 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods: General - - - Semiparametric and Nonparametric Methods
C31 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models

References listed on IDEAS
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  1. Nancy Clements & James Heckman & Jeffrey Smith, 1994. "Making the Most Out Of Social Experiments: Reducing the Intrinsic Uncertainty in Evidence from Randomized Trials with an Application to the JTPA Exp," NBER Technical Working Papers 0149, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  2. Willis, Robert J & Rosen, Sherwin, 1979. "Education and Self-Selection," Journal of Political Economy, University of Chicago Press, vol. 87(5), pages S7-36, October. [Downloadable!] (restricted)
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  3. Angrist, Joshua D, 1990. "Lifetime Earnings and the Vietnam Era Draft Lottery: Evidence from Social Security Administrative Records," American Economic Review, American Economic Association, vol. 80(3), pages 313-36, June.
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  4. Heckman, James J, 1978. "Dummy Endogenous Variables in a Simultaneous Equation System," Econometrica, Econometric Society, vol. 46(4), pages 931-59, July. [Downloadable!] (restricted)
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  5. J.D. Angrist & Guido W. Imbens & D.B. Rubin, 1993. "Identification of Causal Effects Using Instrumental Variables," NBER Technical Working Papers 0136, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  6. Heckman, James J & Honore, Bo E, 1990. "The Empirical Content of the Roy Model," Econometrica, Econometric Society, vol. 58(5), pages 1121-49, September. [Downloadable!] (restricted)
  7. James J. Heckman & Jeffrey A. Smith, 1998. "Evaluating the Welfare State," NBER Working Papers 6542, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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Cited by:
(explanations, 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.)

  1. Freund, D.A. & Kniesner, T.J. & LoSasso, A.T., 1996. "How managed care affects medicaid utilization a synthetic difference-in-differences zero-inflated count model," Discussion Paper 40, Tilburg University, Center for Economic Research. [Downloadable!]
  2. Aki Kangasharju, 2005. "Do Wages Subsidies Increase Employment in Subsidised Firms?," Discussion Papers 378, Government Institute for Economic Research Finland (VATT). [Downloadable!]
    Other versions:
  3. Shlomo Yitzhaki & Edna Schechtman, 2004. "The Gini Instrumental Variable, or the “double instrumental variable” estimator," Metron - International Journal of Statistics, Dipartimento di Statistica, Probabilità e Statistiche Applicate - University of Rome, vol. 0(3), pages 287-313. [Downloadable!]
  4. Saul Lach, 2000. "Do R&D Subsidies Stimulate or Displace Private R&D? Evidence from Israel," NBER Working Papers 7943, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  5. Miguel A. Malo & Fernando Munoz-Bullon, 2005. "Job Matching Quality Effects Of Employment Promotion Measures For People With Disabilities," Business Economics Working Papers wb055315, Universidad Carlos III, Departamento de Economía de la Empresa. [Downloadable!]
  6. Miguel Angel Malo & Fernando Muñoz-Bullón, 2006. "Employment promotion measures and the quality of the job match for persons with disabilities," Hacienda Pública Española, IEF, vol. 179(4), pages 79-111, September. [Downloadable!]
  7. Francisco A. Gallego, 2002. "Competencia y Resultados Educativos: Teoría y Evidencia para Chile," Working Papers Central Bank of Chile 150, Central Bank of Chile. [Downloadable!]
    Other versions:
  8. Lorraine Dearden, 1999. "Qualifications and earnings in Britain: how reliable are conventional OLS estimates of the returns to education?," IFS Working Papers W99/07, Institute for Fiscal Studies. [Downloadable!]
  9. Paula Veiga & Ronald P. Wilder, 2006. "Maternal smoking during pregnancy and birthweight - A propensity score matching approach," Working Papers 32, Núcleo de Investigação em Microeconomia Aplicada (NIMA), Universidade do Minho. [Downloadable!]
  10. Lorraine Dearden, 1998. "Ability, families, education and earnings in Britain," IFS Working Papers W98/14, Institute for Fiscal Studies. [Downloadable!]
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