The presence of an error term does not preclude causal inference in regression: a comment on Krause (2012)

Cameron McIntosh ()

Quality & Quantity: International Journal of Methodology, 2014, vol. 48, issue 1, 243-250

Abstract: A recent article by Krause (Qual Quant, doi: 10.1007/s11135-012-9712-5 , Krause ( 2012 )) maintains that: (1) it is untenable to characterize the error term in multiple regression as simply an extraneous random influence on the outcome variable, because any amount of error implies the possibility of one or more omitted, relevant explanatory variables; and (2) the only way to guarantee the prevention of omitted variable bias and thereby justify causal interpretations of estimated coefficients is to construct fully specified models that completely eliminate the error term. The present commentary argues that such an extreme position is impractical and unnecessary, given the availability of specialized techniques for dealing with the primary statistical consequence of omitted variables, namely endogeneity, or the existence of correlations between included explanatory variables and the error term. In particular, the current article discusses the method of instrumental variable estimation, which can resolve the endogeneity problem in causal models where one or more relevant explanatory variables are excluded, thus allowing for accurate estimation of effects. An overview of recent methodological resources and software for conducting instrumental variables estimation is provided, with the aim of helping to place this crucial technique squarely in the statistical toolkit of applied researchers. Copyright Springer Science+Business Media B.V. 2014

Keywords: Omitted variable bias; Endogeneity; Instrumental variable (search for similar items in EconPapers)
Date: 2014
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DOI: 10.1007/s11135-012-9763-7

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