The Economics of Exclusion Restrictions in IV Models

NBER Working Paper No. 21391

Issued in July 2015

NBER Program(s):Labor Studies, Public Economics



We explore a key underlying assumption, the exclusion restriction, commonly used in interpreting IV estimates in the presence of heterogenous treatment effects as a local average treatment effect (LATE). We show through a series of simple examples that in some commonly featured cases that this assumption is likely to be violated among inframarginal agents, i.e. the always- and never-takers. This violation of the exclusion restriction will generally confound the LATE interpretation of the associated IV results. We discuss potential adjustments to IV estimates in the presence of this bias.

Acknowledgments

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Document Object Identifier (DOI): 10.3386/w21391

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