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Understanding Instrumental Variables in Models with Essential Heterogeneity

  • Heckman, James J.

    ()

    (University of Chicago)

  • Urzua, Sergio

    ()

    (University of Maryland)

  • Vytlacil, Edward

    ()

    (Yale University)

This paper examines the properties of instrumental variables (IV) applied to models with essential heterogeneity, that is, models where responses to interventions are heterogeneous and agents adopt treatments (participate in programs) with at least partial knowledge of their idiosyncratic response. We analyze two-outcome and multiple-outcome models including ordered and unordered choice models. We allow for transition-specific and general instruments. We generalize previous analyses by developing weights for treatment effects for general instruments. We develop a simple test for the presence of essential heterogeneity. We note the asymmetry of the model of essential heterogeneity: outcomes of choices are heterogeneous in a general way; choices are not. When both choices and outcomes are permitted to be symmetrically heterogeneous, the method of IV breaks down for estimating treatment parameters.

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Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 2320.

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Length: 111 pages
Date of creation: Sep 2006
Date of revision:
Publication status: published in: Review of Economics and Statistics, 2006, 88 (3), 389-432
Handle: RePEc:iza:izadps:dp2320
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  1. James J. Heckman & Lance J. Lochner & Petra E. Todd, 2008. "Earnings Functions and Rates of Return," NBER Working Papers 13780, National Bureau of Economic Research, Inc.
  2. Guido W. Imbens, 2004. "Nonparametric Estimation of Average Treatment Effects Under Exogeneity: A Review," The Review of Economics and Statistics, MIT Press, vol. 86(1), pages 4-29, February.
  3. James J. Heckman & Salvador Navarro, 2005. "Dynamic Discrete Choice and Dynamic Treatment Effects," NBER Technical Working Papers 0316, National Bureau of Economic Research, Inc.
  4. Gordon Dahl, 1997. "Mobility and the Returns to Education: Testing A Roy Model With Multiple Markets," Working Papers 760, Princeton University, Department of Economics, Industrial Relations Section..
  5. Flavio Cunha & James J. Heckman & Salvador Navarro, 2007. "The Identification And Economic Content Of Ordered Choice Models With Stochastic Thresholds," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 48(4), pages 1273-1309, November.
  6. James J. Heckman & Edward J. Vytlacil, 2000. "Local Instrumental Variables," NBER Technical Working Papers 0252, National Bureau of Economic Research, Inc.
  7. Edward Vytlacil, 2006. "A Note on Additive Separability and Latent Index Models of Binary Choice: Representation Results," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 68(4), pages 515-518, 08.
  8. Heckman, James J. & Robb, Richard Jr., 1985. "Alternative methods for evaluating the impact of interventions : An overview," Journal of Econometrics, Elsevier, vol. 30(1-2), pages 239-267.
  9. James J. Heckman & Vytlacil, Edward J., 2007. "Econometric Evaluation of Social Programs, Part II: Using the Marginal Treatment Effect to Organize Alternative Econometric Estimators to Evaluate Social Programs, and to Forecast their Effects in New," Handbook of Econometrics, in: J.J. Heckman & E.E. Leamer (ed.), Handbook of Econometrics, edition 1, volume 6, chapter 71 Elsevier.
  10. Heckman, J J & Tobias, Justin & Vytlacil, Ed, 2003. "Simple Estimators for Treatment Parameters in a Latent Variable Framework," Staff General Research Papers 12012, Iowa State University, Department of Economics.
  11. Imbens, Guido W & Angrist, Joshua D, 1994. "Identification and Estimation of Local Average Treatment Effects," Econometrica, Econometric Society, vol. 62(2), pages 467-75, March.
  12. James J. Heckman & Vytlacil, Edward J., 2007. "Econometric Evaluation of Social Programs, Part I: Causal Models, Structural Models and Econometric Policy Evaluation," Handbook of Econometrics, in: J.J. Heckman & E.E. Leamer (ed.), Handbook of Econometrics, edition 1, volume 6, chapter 70 Elsevier.
  13. Yitzhaki, Shlomo, 1996. "On Using Linear Regressions in Welfare Economics," Journal of Business & Economic Statistics, American Statistical Association, vol. 14(4), pages 478-86, October.
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