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Instrumental Variables and the Search for Identification: From Supply and Demand to Natural Experiments

  • Joshua Angrist
  • Alan Krueger

The method of instrumental variables was first used in the 1920s to estimate supply and demand elasticities, and later used to correct for measurement error in single-equation models. Recently, instrumental variables have been widely used to reduce bias from omitted variables in estimates of causal relationships such as the effect of schooling on earnings. Intuitively, instrumental variables methods use only a portion of the variability in key variables to estimate the relationships of interest; if the instruments are valid, that portion is unrelated to the omitted variables. We discuss the mechanics of instrumental variables, and the qualities that make for a good instrument, devoting particular attention to instruments that are derived from 'natural experiments.' A key feature of the natural experiments approach is the transparency and refutability of identifying assumptions. We also discuss the use of instrumental variables in randomized experiments.

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Paper provided by Princeton University, Department of Economics, Industrial Relations Section. in its series Working Papers with number 834.

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Date of creation: Aug 2001
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Handle: RePEc:pri:indrel:dsp01t435gc97f
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  1. Angrist, Joshua D. & Krueger, Alan B., 1999. "Empirical strategies in labor economics," Handbook of Labor Economics, in: O. Ashenfelter & D. Card (ed.), Handbook of Labor Economics, edition 1, volume 3, chapter 23, pages 1277-1366 Elsevier.
  2. Levitt, Steven D, 1997. "Using Electoral Cycles in Police Hiring to Estimate the Effect of Police on Crime," American Economic Review, American Economic Association, vol. 87(3), pages 270-90, June.
  3. Joshua D. Angrist & Alan B. Krueger, 1990. "Does Compulsory School Attendance Affect Schooling and Earnings?," NBER Working Papers 3572, National Bureau of Economic Research, Inc.
  4. Bruce D. Meyer, 1994. "Natural and Quasi- Experiments in Economics," NBER Technical Working Papers 0170, National Bureau of Economic Research, Inc.
  5. Anderson, Patricia M. & Meyer, Bruce D., 2000. "The effects of the unemployment insurance payroll tax on wages, employment, claims and denials," Journal of Public Economics, Elsevier, vol. 78(1-2), pages 81-106, October.
  6. Meyer, Bruce D & Viscusi, W Kip & Durbin, David L, 1995. "Workers' Compensation and Injury Duration: Evidence from a Natural Experiment," American Economic Review, American Economic Association, vol. 85(3), pages 322-40, June.
  7. Hurd, Michael D, 1990. "Research on the Elderly: Economic Status, Retirement, and Consumption and Saving," Journal of Economic Literature, American Economic Association, vol. 28(2), pages 565-637, June.
  8. Goldberger, Arthur S, 1972. "Structural Equation Methods in the Social Sciences," Econometrica, Econometric Society, vol. 40(6), pages 979-1001, November.
  9. Kling, J.R., 1999. "The Effect of Prison Sentence Length on the Subsequent Employment and Earnings of Criminal Defendants," Papers 208, Princeton, Woodrow Wilson School - Public and International Affairs.
  10. Alan B. Krueger, 1999. "Experimental Estimates Of Education Production Functions," The Quarterly Journal of Economics, MIT Press, vol. 114(2), pages 497-532, May.
  11. Evans, William N. & Ringel, Jeanne S., 1999. "Can higher cigarette taxes improve birth outcomes?," Journal of Public Economics, Elsevier, vol. 72(1), pages 135-154, April.
  12. Joshua Angrist, 1989. "Lifetime Earnings and the Vietnam Era Draft Lottery: Evidence from Social Security Administrative Records," Working Papers 631, Princeton University, Department of Economics, Industrial Relations Section..
  13. 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.
  14. Joshua D. Angrist & William N. Evans, 1996. "Children and Their Parents' Labor Supply: Evidence from Exogenous Variation in Family Size," NBER Working Papers 5778, National Bureau of Economic Research, Inc.
  15. Milton Friedman, 1957. "A Theory of the Consumption Function," NBER Books, National Bureau of Economic Research, Inc, number frie57-1, 07.
  16. Douglas Staiger & James H. Stock, 1994. "Instrumental Variables Regression with Weak Instruments," NBER Technical Working Papers 0151, National Bureau of Economic Research, Inc.
  17. Joshua D. Angrist & Alan B. Krueger, 1995. "Split Sample Instrumental Variables," NBER Technical Working Papers 0150, National Bureau of Economic Research, Inc.
  18. Jinyong Hahn & Jerry Hausman, 2002. "A New Specification Test for the Validity of Instrumental Variables," Econometrica, Econometric Society, vol. 70(1), pages 163-189, January.
  19. Jonathan Gruber, 2000. "Disability Insurance Benefits and Labor Supply," Journal of Political Economy, University of Chicago Press, vol. 108(6), pages 1162-1183, December.
  20. Angrist, J.D. & Imbens, G.W., 1992. "Average causal response with variable treatment intensity," Discussion Paper 1992-34, Tilburg University, Center for Economic Research.
  21. David Card, 1994. "Earnings, Schooling, and Ability Revisited," Working Papers 710, Princeton University, Department of Economics, Industrial Relations Section..
  22. Chamberlain, Gary & Imbens, Guido, 1996. "Hierarchical Bayes Models with Many Instrumental Variables," Scholarly Articles 3221489, Harvard University Department of Economics.
  23. Esther Duflo, 2000. "Schooling and Labor Market Consequences of School Construction in Indonesia: Evidence from an Unusual Policy Experiment," NBER Working Papers 7860, National Bureau of Economic Research, Inc.
  24. Bekker, Paul A, 1994. "Alternative Approximations to the Distributions of Instrumental Variable Estimators," Econometrica, Econometric Society, vol. 62(3), pages 657-81, May.
  25. Joshua D. Angrist & Kathryn Graddy & Guido W. Imbens, 1995. "Non-Parametric Demand Analysis with an Application to the Demand for Fish," NBER Technical Working Papers 0178, National Bureau of Economic Research, Inc.
  26. Peter Z. Schochet & John Burghardt & Steven Glazerman, 2000. "National Job Corps Study: The Short-Term Impacts of Job Corps on Participants, Employment, and Related Outcomes," Mathematica Policy Research Reports 547380e5101c4fd88dd00bc4e, Mathematica Policy Research.
  27. Jerry Hausman, 2001. "Mismeasured Variables in Econometric Analysis: Problems from the Right and Problems from the Left," Journal of Economic Perspectives, American Economic Association, vol. 15(4), pages 57-67, Fall.
  28. Kenneth I. Wolpin & Mark R. Rosenzweig, 2000. "Natural "Natural Experiments" in Economics," Journal of Economic Literature, American Economic Association, vol. 38(4), pages 827-874, December.
  29. Blank, Rebecca M, 1991. "The Effects of Double-Blind versus Single-Blind Reviewing: Experimental Evidence from The American Economic Review," American Economic Review, American Economic Association, vol. 81(5), pages 1041-67, December.
  30. Joshua D. Angrist & Victor Lavy, 1999. "Using Maimonides' Rule To Estimate The Effect Of Class Size On Scholastic Achievement," The Quarterly Journal of Economics, MIT Press, vol. 114(2), pages 533-575, May.
  31. Blomquist, Soren & Dahlberg, Matz, 1999. "Small Sample Properties of LIML and Jackknife IV Estimators: Experiments with Weak Instruments," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 14(1), pages 69-88, Jan.-Feb..
  32. Anderson, T W & Kunitomo, Naoto & Sawa, Takamitsu, 1982. "Evaluation of the Distribution Function of the Limited Information Maximum Likelihood Estimator," Econometrica, Econometric Society, vol. 50(4), pages 1009-27, July.
  33. Joshua D. Angrist & Guido W. Imbens & Alan Krueger, 1995. "Jackknife Instrumental Variables Estimation," NBER Technical Working Papers 0172, National Bureau of Economic Research, Inc.
  34. Jeffrey M. Wooldridge, 2001. "Applications of Generalized Method of Moments Estimation," Journal of Economic Perspectives, American Economic Association, vol. 15(4), pages 87-100, Fall.
  35. Angrist, Joshua D & Krueger, Alan B, 1995. "Split-Sample Instrumental Variables Estimates of the Return to Schooling," Journal of Business & Economic Statistics, American Statistical Association, vol. 13(2), pages 225-35, April.
  36. Sawa, Takamitsu, 1973. "Almost Unbiased Estimator in Simultaneous Equations Systems," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 14(1), pages 97-106, February.
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