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Instrumental Variables and the Search for Identification: From Supply and Demand to Natural Experiments

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  • Joshua D. Angrist
  • Alan B. Krueger

Abstract

Instrumental variables was first used in the 1920s to estimate supply and demand elasticities and later to correct for measurement error in single equation models. Recently, instrumental variables have been widely used to reduce bias from omitted variables in estimates of causal relationships. Intuitively, instrumental variables methods use only a portion of the variability in key variables to estimate the relationships of interest; if the instruments are valid, that portion is unrelated to the omitted variables. We discuss the mechanics of instrumental variables and the qualities that make for a good instrument, devoting particular attention to instruments derived from "natural experiments."

Suggested Citation

  • Joshua D. Angrist & Alan B. Krueger, 2001. "Instrumental Variables and the Search for Identification: From Supply and Demand to Natural Experiments," Journal of Economic Perspectives, American Economic Association, vol. 15(4), pages 69-85, Fall.
    • Handle: RePEc:aea:jecper:v:15:y:2001:i:4:p:69-85
    Note: DOI: 10.1257/jep.15.4.69
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    References listed on IDEAS

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    • C30 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - General

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