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Plausibly Exogenous

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  • Timothy G. Conley

    (Graduate School of Business, University of Chicago)

  • Christian B. Hansen

    (Graduate School of Business, University of Chicago)

  • Peter E. Rossi

    (Graduate School of Business, University of Chicago)

Abstract

Instrumental variable (IV) methods are widely used to identify causal effects in models with endogenous explanatory variables. Often the instrument exclusion restriction that underlies the validity of the usual IV inference is suspect; that is, instruments are only plausibly exogenous. We present practical methods for performing inference while relaxing the exclusion restriction. We illustrate the approaches with empirical examples that examine the effect of 401(k) participation on asset accumulation, price elasticity of demand for margarine, and returns to schooling. We find that inference is informative even with a substantial relaxation of the exclusion restriction in two of the three cases. © 2011 The President and Fellows of Harvard College and the Massachusetts Institute of Technology.

Suggested Citation

  • Timothy G. Conley & Christian B. Hansen & Peter E. Rossi, 2012. "Plausibly Exogenous," The Review of Economics and Statistics, MIT Press, vol. 94(1), pages 260-272, February.
  • Handle: RePEc:tpr:restat:v:94:y:2012:i:1:p:260-272
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