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When Good Instruments Go Bad

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Abstract

This note examines the instrumental variables method used by Neumark, Zhang, and Ciccarella (2005) to analyze Wal-Mart's effect on retail labor markets, and exposes major flaws in that methodology. Neumark, Zhang, and Ciccarella use an interaction between distance from Wal-Mart's headquarters and time effects to predict Wal-Mart's presence in a county, and find that each Wal-Mart store destroys, on average, approximately 200 retail jobs. These findings are in stark contrast to Basker (2005) who found a small, but positive and statistically significant, effect on jobs. I show that the IV estimates obtained by Neumark, Zhang, and Ciccarella confound Wal-Mart's causal effect with other factors. To illustrate the problem, I show that their methodology implies a large impact of Wal-Mart not only on retail employment but also on county manufacturing employment. Reduced-form estimates of the regressions show statistically and economically indistinguishable effects in counties with and without Wal-Mart presence, implying that other factors are most likely driving the results.

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File URL: http://economics.missouri.edu/working-papers/2007/WP0706_basker.pdf
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Bibliographic Info

Paper provided by Department of Economics, University of Missouri in its series Working Papers with number 0706.

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Length: 31 pgs.
Date of creation: 15 Mar 2007
Date of revision:
Handle: RePEc:umc:wpaper:0706

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Keywords: Instrumental Variables; Wal-Mart; Retail Employment;

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References

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  1. Jinyong Hahn & Jerry Hausman, 2002. "A New Specification Test for the Validity of Instrumental Variables," Econometrica, Econometric Society, vol. 70(1), pages 163-189, January.
  2. 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.
  3. Neumark, David & Zhang, Junfu & Ciccarella, Stephen, 2008. "The effects of Wal-Mart on local labor markets," Journal of Urban Economics, Elsevier, vol. 63(2), pages 405-430, March.
  4. Thomas J. Holmes, 2008. "The Diffusion of Wal-Mart and Economies of Density," NBER Working Papers 13783, National Bureau of Economic Research, Inc.
  5. Thomas J. Holmes & John J. Stevens, 2004. "Geographic concentration and establishment size: analysis in an alternative economic geography model," Journal of Economic Geography, Oxford University Press, vol. 4(3), pages 227-250, June.
  6. Emek Basker, 2003. "Job Creation or Destruction? Labor-Market Effects of Wal-Mart Expansion," Labor and Demography 0303002, EconWPA, revised 11 Mar 2005.
  7. repec:fth:prinin:311 is not listed on IDEAS
  8. Maluccio, John A., 1998. "Endogeneity of schooling in the wage function," FCND discussion papers 54, International Food Policy Research Institute (IFPRI).
  9. Daron Acemoglu & Joshua Angrist, 1999. "How Large are the Social Returns to Education? Evidence from Compulsory Schooling Laws," Working papers 99-30, Massachusetts Institute of Technology (MIT), Department of Economics.
  10. Jeffrey D. Sachs, 2003. "Institutions Don't Rule: Direct Effects of Geography on Per Capita Income," NBER Working Papers 9490, National Bureau of Economic Research, Inc.
  11. Thomas J. Kane & Cecilia E. Rouse, 1993. "Labor Market Returns to Two- and Four-Year Colleges: Is a Credit a Credit and Do Degrees Matter?," NBER Working Papers 4268, National Bureau of Economic Research, Inc.
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Cited by:
  1. Courtemanche, Charles & Carden, Art, 2011. "Competing with Costco and Sam's Club: Warehouse Club Entry and Grocery Prices," Working Papers 11-7, University of North Carolina at Greensboro, Department of Economics.
  2. Emek Basker, 2008. "Does Wal-Mart Sell Inferior Goods?," Working Papers 0805, Department of Economics, University of Missouri.
  3. John Haltiwanger & Ron Jarmin & C. J. Krizan, 2010. "Mom-and-Pop Meet Big Box: Complements or Substitutes?," NBER Chapters, in: Cities and Entrepreneurship National Bureau of Economic Research, Inc.
  4. Bonanno, Alessandro & Lopez, Rigoberto A., 2009. "Is Wal-Mart a Monopsony? Evidence from Local Labor Markets," 2009 Conference, August 16-22, 2009, Beijing, China 51289, International Association of Agricultural Economists.
  5. Emek Basker, 2007. "The Causes and Consequences of Wal-Mart's Growth," Journal of Economic Perspectives, American Economic Association, vol. 21(3), pages 177-198, Summer.
  6. Courtemanche, Charles & Carden, Art, 2009. "The skinny on big box retailing: Wal-Mart, warehouse clubs, and obesity," MPRA Paper 25326, University Library of Munich, Germany.
  7. Fernando Borraz & Juan Dubra & Daniel Ferrés & Leandro Zipitría, 2013. "Supermarket Entry and The Survival of Small Stores," Documentos de Trabajo/Working Papers 1303, Facultad de Ciencias Empresariales y Economia. Universidad de Montevideo..

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