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The Economics of Exclusion Restrictions in IV Models

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  • Damon Jones

Abstract

We explore a key underlying assumption, the exclusion restriction, commonly used in interpreting IV estimates in the presence of heterogenous treatment effects as a local average treatment effect (LATE). We show through a series of simple examples that in some commonly featured cases that this assumption is likely to be violated among inframarginal agents, i.e. the always- and never-takers. This violation of the exclusion restriction will generally confound the LATE interpretation of the associated IV results. We discuss potential adjustments to IV estimates in the presence of this bias.

Suggested Citation

  • Damon Jones, 2015. "The Economics of Exclusion Restrictions in IV Models," NBER Working Papers 21391, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:21391
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    1. Rothstein, Jesse & Rouse, Cecilia Elena, 2011. "Constrained after college: Student loans and early-career occupational choices," Journal of Public Economics, Elsevier, vol. 95(1), pages 149-163.
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    Cited by:

    1. Andreas Steinmayr, 2016. "Exposure to Refugees and Voting for the Far-Right. (Unexpected) Results from Austria," WIFO Working Papers 514, WIFO.
    2. Trevon D. Logan, 2018. "Do Black Politicians Matter?," NBER Working Papers 24190, National Bureau of Economic Research, Inc.
    3. Huber, Martin & Wüthrich, Kaspar, 2017. "Evaluating local average and quantile treatment effects under endogeneity based on instruments: a review," FSES Working Papers 479, Faculty of Economics and Social Sciences, University of Freiburg/Fribourg Switzerland.
    4. Rodney J. Andrews & John Thompson, 2017. "Earning your CAP: A Comprehensive Analysis of The University of Texas System's Coordinated Admissions Program," NBER Working Papers 23442, National Bureau of Economic Research, Inc.
    5. Hans (J.L.W.) van Kippersluis & Niels (C.A.) Rietveld, 2017. "Beyond Plausibly Exogenous," Tinbergen Institute Discussion Papers 17-096/V, Tinbergen Institute.
    6. Huber Martin & Wüthrich Kaspar, 2019. "Local Average and Quantile Treatment Effects Under Endogeneity: A Review," Journal of Econometric Methods, De Gruyter, vol. 8(1), pages 1-27, January.

    More about this item

    JEL classification:

    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
    • C26 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Instrumental Variables (IV) Estimation
    • C36 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Instrumental Variables (IV) Estimation

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