One Instrument to Rule Them All: The Bias and Coverage of Just-ID IV

Joshua Angrist and Michal Koles\'ar

Papers from arXiv.org

Abstract: We revisit the finite-sample behavior of single-variable just-identified instrumental variables (just-ID IV) estimators, arguing that in most microeconometric applications, the usual inference strategies are likely reliable. Three widely-cited applications are used to explain why this is so. We then consider pretesting strategies of the form $t_{1}>c$, where $t_{1}$ is the first-stage $t$-statistic, and the first-stage sign is given. Although pervasive in empirical practice, pretesting on the first-stage $F$-statistic exacerbates bias and distorts inference. We show, however, that median bias is both minimized and roughly halved by setting $c=0$, that is by screening on the sign of the \textit{estimated} first stage. This bias reduction is a free lunch: conventional confidence interval coverage is unchanged by screening on the estimated first-stage sign. To the extent that IV analysts sign-screen already, these results strengthen the case for a sanguine view of the finite-sample behavior of just-ID IV.

Date: 2021-10, Revised 2022-12
New Economics Papers: this item is included in nep-ecm
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Citations: View citations in EconPapers (9)

Published in Journal of Econometrics, Volume 240, Issue 2, March 2024, 105398

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Related works:
Journal Article: One instrument to rule them all: The bias and coverage of just-ID IV (2024)
Working Paper: One Instrument to Rule Them All: The Bias and Coverage of Just-ID IV (2022)
Working Paper: One Instrument to Rule Them All: The Bias and Coverage of Just-ID IV (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:arx:papers:2110.10556

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