Relaxing the Exclusion Restriction in Shift-Share Instrumental Variable Estimation
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The widely used shift-share instrument is generated by summing the products of regional shares and aggregate shifts. All products must fulfill the exclusion restriction, for the instrument to be valid. I propose applying methods which can preselect invalid products when either more than half or the largest group of products is valid. I discuss extensions of these methods for fixed effects models. I illustrate the procedures with three applications: a simulation study, the labor market effect of Chinese import competition and the effect of immigration to the US. My results help explain why previous studies have found low effects of immigration.
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