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State the two necessary properties of a good instrumental variable
In real-world settings, articulate the two properties of a good instrument and critique the instruments used by researchers.
Apply the instrumental variables, or two-stage least squares, estimator to solve the endogeneity problem
- Consumption and Permanent Income
- Malaria, Institutions, and Economic Growth
- How Much Does Schooling Increase Wages?
Additional examples that we discuss in the textbook:
- The Supply and Demand of Food
- Do Migrant Remittances Increase Income Inequality?
- What’s a Year of College Worth?
- Economic Growth and Civil Wars
- Technology and Income Growth
- Class Size and Children’s Economic Performance
What We Learned
Good instruments must satisfy two conditions in order to convincingly solve the endogeneity problem.
IV1: an instrument must be strongly correlated with the endogenous right-hand-side variable.
IV2: an instrument must not be correlated with the error term in the main equation of interest.
- Finding a good instrument is really hard