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Understanding Instrumental Variables in Models with Essential Heterogeneity

James Heckman, Sergio Urzua and Edward Vytlacil ()

The Review of Economics and Statistics, 2006, vol. 88, issue 3, 389-432

Abstract: This paper examines the properties of instrumental variables (IV) applied to models with essential heterogeneity, that is, models where responses to interventions are heterogeneous and agents adopt treatments (participate in programs) with at least partial knowledge of their idiosyncratic response. We analyze two-outcome and multiple-outcome models, including ordered and unordered choice models. We allow for transition-specific and general instruments. We generalize previous analyses by developing weights for treatment effects for general instruments. We develop a simple test for the presence of essential heterogeneity. We note the asymmetry of the model of essential heterogeneity: outcomes of choices are heterogeneous in a general way; choices are not. When both choices and outcomes are permitted to be symmetrically heterogeneous, the method of IV breaks down for estimating treatment parameters. Copyright by the President and Fellows of Harvard College and the Massachusetts Institute of Technology.

Date: 2006
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Working Paper: Understanding Instrumental Variables in Models with Essential Heterogeneity (2009) Downloads
Working Paper: Understanding Instrumental Variables in Models with Essential Heterogeneity (2006) Downloads
Working Paper: Understanding Instrumental Variables in Models with Essential Heterogeneity (2006) Downloads
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The Review of Economics and Statistics is currently edited by Amitabh Chandra, Olivier Coibion, Bryan S. Graham, Shachar Kariv, Amit K. Khandelwal, Asim Ijaz Khwaja, Brigitte C. Madrian and Rohini Pande

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