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

Author

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  • Michel Berthélemy

    (TECH ECO (ex-ITESE) - Institut Technico-Economie - CEA-DES (ex-DEN) - CEA-Direction des Energies (ex-Direction de l'Energie Nucléaire) - CEA - Commissariat à l'énergie atomique et aux énergies alternatives - Université Paris-Saclay)

  • Petyo Bonev

    (FHSG - University of Applied Sciences St. Gallen)

  • Damien Dussaux

    (CERNA i3 - Centre d'économie industrielle i3 - Mines Paris - PSL (École nationale supérieure des mines de Paris) - PSL - Université Paris Sciences et Lettres - I3 - Institut interdisciplinaire de l’innovation - CNRS - Centre National de la Recherche Scientifique)

  • Magnus Söderberg

    (SDU - University of Southern 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

  • Michel Berthélemy & Petyo Bonev & Damien Dussaux & Magnus Söderberg, 2018. "Methods for strengthening a weak instrument in the case of a persistent treatment," Post-Print hal-01829558, HAL.
    • Handle: RePEc:hal:journl:hal-01829558
    DOI: 10.1515/snde-2015-0094
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