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Understanding Instrumental Variables in Models with Essential Heterogeneity

James Heckman, Sergio Urzua and Edward Vytlacil ()

No 2320, IZA Discussion Papers from Institute of Labor Economics (IZA)

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.

Keywords: unobserved heterogeneity; instrumental variables; treatment parameters; policy evaluation (search for similar items in EconPapers)
JEL-codes: C31 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-dcm and nep-ecm
Date: 2006-09
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Published in: Review of Economics and Statistics, 2006, 88 (3), 389-432

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http://ftp.iza.org/dp2320.pdf (application/pdf)

Related works:
Working Paper: Understanding Instrumental Variables in Models with Essential Heterogeneity (2009) Downloads
Journal Article: 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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