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An Economic Analysis of Exclusion Restrictions for Instrumental Variable Estimation

  • van den Berg, Gerard J

Instrumental variable estimation requires untestable exclusion restrictions. With policy effects on individual outcomes, there is typically a time interval between the moment the agent realizes that he may be exposed to the policy and the actual exposure or the announcement of the actual treatment status. In such cases there is an incentive for the agent to acquire information on the value of the IV. This leads to violation of the exclusion restriction. We analyze this in a dynamic economic model framework. This provides a foundation of exclusion restrictions in terms of economic behavior. The results are used to describe policy evaluation settings in which instrumental variables are likely or unlikely to make sense. For the latter cases we analyze the asymptotic bias. The exclusion restriction is more likely to be violated if the outcome of interest strongly depends on interactions between the agent's effort before the outcome is realized and the actual treatment status. The bias has the same sign as this interaction effect. Violation does not causally depend on the weakness of the candidate instrument or the size of the average treatment effect. With experiments, violation is more likely if the treatment and control groups are to be of similar size. We also address side-effects. We develop a novel economic interpretation of placebo effects and provide some empirical evidence for the relevance of the analysis.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 6157.

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Date of creation: Mar 2007
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Handle: RePEc:cpr:ceprdp:6157
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  1. van den Berg, Gerard J. & Lindeboom, Maarten & López, Marta, 2006. "Inequality in Individual Mortality and Economic Conditions Earlier in Life," IZA Discussion Papers 2425, Institute for the Study of Labor (IZA).
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  11. Andersson, Christian, 2007. "Teacher density and student achievement in Swedish compulsory schools," Working Paper Series 2007:5, Uppsala University, Department of Economics.
  12. Jaap Abbring & Gerard van den Berg, 2005. "Social experiments and instrumental variables with duration outcomes," IFS Working Papers W05/19, Institute for Fiscal Studies.
  13. Anup Malani, 2006. "Identifying Placebo Effects with Data from Clinical Trials," Journal of Political Economy, University of Chicago Press, vol. 114(2), pages 236-256, April.
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