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Identification with Imperfect Instruments

  • Aviv Nevo
  • Adam M. Rosen

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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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 14434.

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Date of creation: Oct 2008
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Publication status: published as Aviv Nevo & Adam M. Rosen, 2012. "Identification With Imperfect Instruments," The Review of Economics and Statistics, MIT Press, vol. 94(3), pages 659-671, August.
Handle: RePEc:nbr:nberwo:14434
Note: IO PR TWP
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