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Is Monotonicity in an IV and RD Design Testable? No, But You Can Still Check on it

Ben Edwards, Mario Fiorini (), Katrien Stevens and Matthew Taylor
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Ben Edwards: Australian Institute of Family Studies
Katrien Stevens: School of Economics, University of Sydney
Matthew Taylor: Australian Institute of Family Studies

No 7, Working Paper Series from Economics Discipline Group, UTS Business School, University of Technology, Sydney

Abstract: Whenever treatment effects are heterogeneous and there is sorting into treatment based on the gain, monotonicity is a condition that both Instrumental Variable and fuzzy Regression Discontinuity designs have to satisfy for their estimand to be interpretable as a LATE. Angrist and Imbens (1995) argue that the monotonicity assumption is testable whenever the treatment is multivalued. We show that their test is informative if counterfactuals are observed. Yet applying the test without observing counterfactuals, as it is generally done, is not. Nevertheless, we argue that monotonicity can and should be investigated using a mix of economic intuition and data patterns, just like other untestable assumptions in an IV or RD design. We provide examples in a variety of settings as a guide to practice.

New Economics Papers: this item is included in nep-ecm
Date: 2013-04-01
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