One Instrument to Rule Them All: The Bias and Coverage of Just-ID IV

Joshua Angrist and Michal Kolesár

No 29417, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We revisit the finite-sample behavior of just-identified instrumental variables (IV) estimators, arguing that in most microeconometric applications, just-identified IV bias is negligible and the usual inference strategies 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.

JEL-codes: C21 C26 C31 C36 J08 (search for similar items in EconPapers)
Date: 2021-10
New Economics Papers: this item is included in nep-lab and nep-ore
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Citations: View citations in EconPapers (13)

Published as Joshua Angrist & Michal Kolesár, 2023. "One instrument to rule them all: The bias and coverage of just-ID IV," Journal of Econometrics, .

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Related works:
Journal Article: One instrument to rule them all: The bias and coverage of just-ID IV (2024)
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)
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