Instrumental variables regressions with honestly uncertain exclusion restrictions, Vol. 1 of 1

About

Countries

Data & Research

Learning

News

Projects & Operations

Publications

Topics

Home > Data & Research > Author Profile > Report Details

Instrumental variables regressions with honestly uncertain exclusion restrictions

Author:	Kraay, Aart;	Collection Title:	Policy Research working paper ; no. WPS 4632
Country:	World;	Date Stored:	2008/05/27
Document Date:	2008/05/01	Document Type:	Policy Research Working Paper
Language:	English	Region:	The World Region
Report Number:	WPS4632	SubTopics:	Econometrics; Access to Finance; Economic Theory & Research; Currencies and Exchange Rates; Statistical & Mathematical Sciences
Volume No:	1 of 1

Summary: The validity of instrumental variables (IV) regression models depends crucially on fundamentally untestable exclusion restrictions. Typically exclusion restrictions are assumed to hold exactly in the relevant population, yet in many empirical applications there are reasonable prior grounds to doubt their literal truth. In this paper I show how to incorporate prior uncertainty about the validity of the exclusion restriction into linear IV models, and explore the consequences for inference. In particular I provide a mapping from prior uncertainty about the exclusion restriction into increased uncertainty about parameters of interest. Moderate prior uncertainty about exclusion restrictions can lead to a substantial loss of precision in estimates of structural parameters. This loss of precision is relatively more important in situations where IV estimates appear to be more precise, for example in larger samples or with stronger instruments. The author illustrates these points using several prominent recent empirical papers that use linear IV models.


Official Documents Official, scanned versions of documents (may include signatures, etc.)
File Type		Description	File Size (mb)

	PDF 42 pages	Official version*	2.94 (approx.)
	Text	Text version**

* The official version is derived from scanning the final, paper copy of the document and is the official,
archived version including all signatures, charts, etc.

** The text version is the OCR text of the final scanned version and is not an accurate representation of the final text.
It is provided solely to benefit users with slow connectivity.

Permanent URL for this page: http://go.worldbank.org/M841WWERO0