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Methods for strengthening a weak instrument in the case of a persistent treatment

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  • Berthélemy Michel

    (COMUE Universite Paris-Saclay, Commissariat à l’Energie Atomique et aux Energies Alternatives, Saint-Aubin, Île-de-France, France)

  • Bonev Petyo

    (University of St.Gallen, St. Gallen, Switzerland)

  • Dussaux Damien

    (Mines ParisTech, PSL Research University, CERNA, i3 UMR CNRS, Paris, France)

  • Söderberg Magnus

    (University of Southern Denmark, Energy Management Centre, Niels Bohrs vej 9Esbjerg, Denmark)

Abstract

When evaluating policy treatments that are persistent and endogenous, available instrumental variables often exhibit more variation over time than the treatment variable. This leads to a weak instrumental variable problem, resulting in high bias or uninformative confidence intervals. We evaluate two new estimation approaches that strengthen the instrument. We derive their theoretical properties and show in Monte Carlo simulations that they outperform standard IV-estimators. We use our procedures to estimate the effect of public utility divestiture in the US nuclear energy sector. Our results show that divestiture significantly increases production efficiency.

Suggested Citation

  • Berthélemy Michel & Bonev Petyo & Dussaux Damien & Söderberg Magnus, 2019. "Methods for strengthening a weak instrument in the case of a persistent treatment," Studies in Nonlinear Dynamics & Econometrics, De Gruyter, vol. 23(1), pages 1-30, February.
    • Handle: RePEc:bpj:sndecm:v:23:y:2019:i:1:p:30:n:1
    DOI: 10.1515/snde-2015-0094
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