Economics Working Papers

Publication Date

9-11-2018

Number

18014

Abstract

In this paper, I consider identification of treatment effects when
the treatment is endogenous. The use of instrumental variables is a popular
solution to deal with endogeneity, but this may give misleading answers when
the instrument is invalid. I show that when the instrument is invalid due to
correlation with the first stage unobserved heterogeneity, a second (also
possibly invalid) instrument allows to partially identify not only the local
average treatment effect but also the entire potential outcomes distributions
for compliers. I exploit the fact that the distribution of the observed
outcome in each group defined by the treatment and the instrument is a
mixture of the distributions of interest. I write the identified set in the
form of conditional moment inequalities, and provide an easily implementable
inference procedure. Under some (testable) tail restrictions, the potential
outcomes distributions are point-identified for compliers. Finally, I
illustrate my methodology on data from the National Longitudinal Survey of
Young Men to estimate returns to college using college proximity as
(potential) instrument. I find that a college degree increases the average
hourly wage of the compliers by 38-79%.

JEL Classification

C21, C25, C26

Version History

Originial Release Date: September 11, 2018

Departments

Department of Economics, Iowa State University

File Format

application/pdf

Length

52 pages

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