Plausibly Exogenous

TLDR

IV methods are widely used to identify causal effects, but the exclusion restriction is often suspect, making instruments only plausibly exogenous. The study presents practical methods for inference that relax the exclusion restriction. The authors illustrate these methods with empirical examples on 401(k) participation, margarine demand elasticity, and schooling returns. Inference remains informative even with substantial relaxation of the exclusion restriction in two of the three empirical examples.

Abstract

Instrumental variable (IV) methods are widely used to identify causal effects in models with endogenous explanatory variables. Often the instrument exclusion restriction that underlies the validity of the usual IV inference is suspect; that is, instruments are only plausibly exogenous. We present practical methods for performing inference while relaxing the exclusion restriction. We illustrate the approaches with empirical examples that examine the effect of 401(k) participation on asset accumulation, price elasticity of demand for margarine, and returns to schooling. We find that inference is informative even with a substantial relaxation of the exclusion restriction in two of the three cases.