The Cure Can Be Worse than the Disease: A Cautionary Tale Regarding Instrumental Variables

John Bound, David A. Jaeger, Regina Baker

NBER Technical Working Paper No. 137
Issued in June 1993
NBER Program(s):   LS

In this paper we draw attention to two problems associated with the use of instrumental variables (IV) whose importance for empirical work has not been fully appreciated. First, using potential instruments that explain little of the variation in the: endogenous explanatory variables can lead to large inconsistencies of the IV estimates even If only a weal< relationship exists between the Instruments and the error in the structural equation. Second. In finite samples. IV estimates are biased in the same direction as ordinary least squares (OLS) estimates. The magnitude of the bias of IV estimates approaches that of OLS estimates as the R[squared] between the instruments and the potentially endogenous explanatory variable approaches O. To illustrate these problems with IV estimation we reexamine the results of the recent provocative paper by Angrist and Krueger "Does Compulsory School Attendance Affect Schooling and Earnings?" and find evidence that their IV estimates of the effects of educational attainment on earnings are possibly both inconsistent and suffer from finite sample bias. To gauge the severity of both problems we suggest that both the partial R[squared] and the F statistic on the excluded instruments from the first stage estimation be reported when using IV as approximate guides to the quality of the IV estimates.

download in pdf format
   (203 K)

email paper

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/t0137

Published: "Problems with Instrumental Variables Estimation when the Correlation Between the Instruments and the Endogenous Explanatory Variables is Weak," Journal of the American Statistical Association, 90 (June): 443-450. 1995

Users who downloaded this paper also downloaded* these:
Bound and Jaeger w5835 On the Validity of Season of Birth as an Instrument in Wage Equations: A Comment on Angrist & Krueger's "Does Compulsory School Attendance Affect Scho
Stock and Yogo t0284 Testing for Weak Instruments in Linear IV Regression
Staiger and Stock t0151 Instrumental Variables Regression with Weak Instruments
Landes and Posner w0110 The Independent Judiciary in an Interest-Group Perspective
Angrist and Krueger t0150 Split Sample Instrumental Variables
NBER Videos

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us