An economic analysis of exclusion restrictions for instrumental variable estimation

Gerard van den Berg

No 2007:10, Working Paper Series from IFAU - Institute for Evaluation of Labour Market and Education Policy

Abstract: Instrumental variable estimation requires untestable exclusion restrictions. With policy effects on inidividual outcomes, there is typically a time interval between the moment the agent realizes that he may be exposed to the policy and the actual exposure or the announcement of the actual treatment status. In such cases there is an incentive for the agent to acquire information on the value of the IV. This leads to violation of the exclusion restriction. We analyze this in a dynamic economic model framework. This provides a foundation of exclusion restrictions in terms of economic behavior. The results are used to describe policy evaluation settings in which instrumental variables are likely or unlikely to make sense. For the latter cases we analyze the asymptotic bias. The exclusion restriction is more likely to be violated if the outcome of interest strongly depends on interactions between the agent's effort before the outcome is realized and the actual treatment status. The bias has the same sign as this interaction effect. Violation does not causally depend on the weakness of the candidate intstrument or the size of the average treatment effect. With experiments, violation is more likely if the treatment and control groups are to be of similar size. We also address side-effects. We develop a novel economic interpretation of placebo effects and provide some empirical evidence for the relevance of the analysis.

Keywords: Treatment; policy evaluation; information; selection effects; randomization; placebo effect (search for similar items in EconPapers)
JEL-codes: J64 (search for similar items in EconPapers)
Pages: 41 pages
Date: 2007-02-18
New Economics Papers: this item is included in nep-ecm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (11)

Downloads: (external link)
http://www.ifau.se/upload/pdf/se/2007/wp07-10.pdf (application/pdf)
Our link check indicates that this URL is bad, the error code is: 404 Not Found (http://www.ifau.se/upload/pdf/se/2007/wp07-10.pdf [301 Moved Permanently]--> https://www.ifau.se/upload/pdf/se/2007/wp07-10.pdf)

Related works:
Working Paper: An Economic Analysis of Exclusion Restrictions for Instrumental Variable Estimation (2007)
Working Paper: An Economic Analysis of Exclusion Restrictions for Instrumental Variable Estimation (2007)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:hhs:ifauwp:2007_010

Access Statistics for this paper

More papers in Working Paper Series from IFAU - Institute for Evaluation of Labour Market and Education Policy IFAU, P O Box 513, SE-751 20 Uppsala, Sweden. Contact information at EDIRC.
Bibliographic data for series maintained by Ali Ghooloo ( this e-mail address is bad, please contact ).