Testing IV Validity and LATE Interpretation Using Flexible Covariate Specifications

Anna Krumme () and Matthias Westphal ()
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Anna Krumme: FernUniversität in Hagen
Matthias Westphal: FernUniversität Hagen

No 18573, IZA Discussion Papers from IZA Network @ LISER

Abstract: Building on the testable implications for IV validity underlying local average treatment effect (LATE) estimation, we (i) propose a simple testing procedure that may accommodate high-dimensional covariates and (ii) demonstrate that it can also detect biases arising from misspecified IV regression models. While recent research has highlighted the importance of a correct covariate specification, existing IV validity tests are not designed to capture this source of bias. Simulation studies strongly suggest that the test performs well at detecting violations of conditional independence, violations of the exclusion restriction, and biases arising from covariate misspecification.

Keywords: testing instrument validity; local average treatment effects; covariate misspecification (search for similar items in EconPapers)
JEL-codes: C12 C21 C26 C52 (search for similar items in EconPapers)
Date: 2026-04
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