Networked instrumental variable estimation: The case of Hausman-style instruments

Xiangyu Shi

MPRA Paper from University Library of Munich, Germany

Abstract: In this paper, I argue that in situations of complex network dependence, the traditional and widely used Hausman-style instrumental variable estimation may not be valid for causal identification. This is the case for inter-regional migration networks when evaluating place-based labor market policies, and for correlated unobserved consumer tastes in the product and geographic space in demand estimation. I build an economic model for these two cases, respectively, to derive the estimating equation and to shed light on the fallacy---omitted variable bias and the resulting violation of exclusion restriction---of the traditional econometric framework. I then build an alternative econometric framework and propose a new approach to estimation that exploits higher-order network neighbors and, then, I establish its desirable properties. I conduct Monte Carlo simulations and two empirical analyses that each correspond to the two economic models to validate this new approach of estimation.

Keywords: treatment effect; network; instrumental variable; Hausman IV; spatial linkages; migration network; demand estimation (search for similar items in EconPapers)
JEL-codes: C0 C1 C3 (search for similar items in EconPapers)
Date: 2024-06
New Economics Papers: this item is included in nep-ecm, nep-mig and nep-net
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:121349

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