One instrument to rule them all: The bias and coverage of just-ID IV

Joshua Angrist and Michal Kolesár

Journal of Econometrics, 2024, vol. 240, issue 2

Abstract: We revisit the finite-sample behavior of single-variable just-identified instrumental variables (just-ID IV) estimators, arguing that in most microeconometric applications, the usual inference strategies are likely reliable. Three widely-cited applications are used to explain why this is so. We then consider pretesting strategies of the form t1>c, where t1 is the first-stage t-statistic, and the first-stage sign is given. Although pervasive in empirical practice, pretesting on the first-stage F-statistic exacerbates bias and distorts inference. We show, however, that median bias is both minimized and roughly halved by setting c=0, that is by screening on the sign of the estimated first stage. This bias reduction is a free lunch: conventional confidence interval coverage is unchanged by screening on the estimated first-stage sign. To the extent that IV analysts sign-screen already, these results strengthen the case for a sanguine view of the finite-sample behavior of just-ID IV.

Keywords: Instrumental variables; Weak instruments; Bias; Confidence intervals (search for similar items in EconPapers)
JEL-codes: C01 C26 C31 C36 J08 (search for similar items in EconPapers)
Date: 2024
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)

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Related works:
Working Paper: One Instrument to Rule Them All: The Bias and Coverage of Just-ID IV (2022)
Working Paper: One Instrument to Rule Them All: The Bias and Coverage of Just-ID IV (2022)
Working Paper: One Instrument to Rule Them All: The Bias and Coverage of Just-ID IV (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:econom:v:240:y:2024:i:2:s0304407623000295

DOI: 10.1016/j.jeconom.2022.12.012

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