A Practical Guide to Instrumental Variables Methods with Heterogeneous Treatment Effects

Tymon Stoczyński, Liang Sun, S. Derya Uysal and Derya Uysal

No 12696, CESifo Working Paper Series from CESifo

Abstract: Instrumental variables (IV) methods are central to applied microeconomics. While classical approaches assume linear models with constant effects, recent literature has shifted toward the local average treatment effect (LATE) framework to accommodate heterogeneous treatment effects. This paper provides a practical guide to aligning empirical practice with recent theory. We first examine how different specifications with covariates lead to distinct weighted averages of covariate-specific LATEs. We then discuss how parametric misspecification can undermine the causal interpretation of these estimands and suggest flexible specifications as essential robustness checks. Finally, we review formal tests for LATE assumptions and methods robust to monotonicity violations. We provide a guide to software implementations to help researchers apply the methods in practice.

Keywords: instrumental variables; local average treatment effect; heterogeneous treatment effects; two-stage least squares; double machine learning; monotonicity; instrument validity (search for similar items in EconPapers)
JEL-codes: C14 C21 C26 C52 (search for similar items in EconPapers)
Date: 2026
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