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Testing IV Validity and LATE Interpretation Using Flexible Covariate Specifications

Author

Listed:
  • Krumme, Anna

    (FernUniversität in Hagen)

  • Westphal, Matthias

    (FernUniversität Hagen)

Abstract

Building on the testable implications for IV validity underlying local average treatment effect (LATE) estimation, we (i) propose a simple testing procedure that may accommodate high-dimensional covariates and (ii) demonstrate that it can also detect biases arising from misspecified IV regression models. While recent research has highlighted the importance of a correct covariate specification, existing IV validity tests are not designed to capture this source of bias. Simulation studies strongly suggest that the test performs well at detecting violations of conditional independence, violations of the exclusion restriction, and biases arising from covariate misspecification.

Suggested Citation

  • Krumme, Anna & Westphal, Matthias, 2026. "Testing IV Validity and LATE Interpretation Using Flexible Covariate Specifications," IZA Discussion Papers 18573, IZA Network @ LISER.
    • Handle: RePEc:iza:izadps:dp18573
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    References listed on IDEAS

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    Keywords

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    JEL classification:

    • C12 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Hypothesis Testing: General
    • C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models
    • C26 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Instrumental Variables (IV) Estimation
    • C52 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Evaluation, Validation, and Selection

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