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Identification with imperfect instruments

  • Aviv Nevo

    ()

    (Institute for Fiscal Studies and Berkeley)

  • Adam Rosen

    ()

    (Institute for Fiscal Studies and cemmap and UCL)

Dealing with endogenous regressors is a central challenge of applied research. The standard solution is to use instrumental variables that are assumed to be uncorrelated with unobservables. We instead assume (i) the correlation between the instrument and the error term has the same sign as the correlation between the endogenous regressor and the error term, and (ii) that the instrument is less correlated with the error term than is the endogenous regressor. Using these assumptions, we derive analytic bounds for the parameters. We demonstrate the method in two applications.

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File URL: http://cemmap.ifs.org.uk/wps/cwp1608.pdf
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Paper provided by Centre for Microdata Methods and Practice, Institute for Fiscal Studies in its series CeMMAP working papers with number CWP16/08.

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Date of creation: Jun 2008
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Handle: RePEc:ifs:cemmap:16/08
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