NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Identification with Imperfect Instruments

Aviv Nevo, Adam M. Rosen

NBER Working Paper No. 14434
Issued in October 2008
NBER Program(s):   IO   PR   TWP

Dealing with endogenous regressors is a central challenge of applied research. The standard solution is to use instrumental variables that are assumed to be uncorrelated with unobservables. We instead assume (i) the correlation between the instrument and the error term has the same sign as the correlation between the endogenous regressor and the error term, and (ii) that the instrument is less correlated with the error term than is the endogenous regressor. Using these assumptions, we derive analytic bounds for the parameters. We demonstrate the method in two applications.

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Document Object Identifier (DOI): 10.3386/w14434

Published: Aviv Nevo & Adam M. Rosen, 2012. "Identification With Imperfect Instruments," The Review of Economics and Statistics, MIT Press, vol. 94(3), pages 659-671, August.

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