A Practical Guide to Endogeneity Correction Using Copulas

Yi Qian, Anthony Koschmann and Hui Xie

No 32231, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Causal inference is of central interest in many empirical applications, yet often challenging because of the presence of endogenous regressors. The classical approach to the problem requires using instrumental variables that must satisfy the stringent condition of exclusion restriction. In recent research, instrument-free copula methods have been increasingly used to handle endogenous regressors. This article aims to provide a practical guide for how to handle endogeneity using copulas. The authors give an overview of copula endogeneity correction, outlining its theoretical rationales and advantages for empirical research. They also discuss recent advances that enhance the understanding, applicability, and robustness of copula correction, and address implementation aspects of copula correction such as constructing copula control functions and handling higher-order terms of endogenous regressors. To facilitate the appropriate usage of copula correction in order to realize its full potential, the authors detail a process of checking data requirements and identification assumptions to determine when and how to use copula correction methods, and illustrate its usage using empirical examples.

JEL-codes: C01 C10 C5 (search for similar items in EconPapers)
Date: 2024-03
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