NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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The Economics of Exclusion Restrictions in IV Models

Damon Jones

NBER Working Paper No. 21391
Issued in July 2015
NBER Program(s):The Labor Studies Program, The Public Economics Program

We explore a key underlying assumption, the exclusion restriction, commonly used in interpreting IV estimates in the presence of heterogenous treatment effects as a local average treatment effect (LATE). We show through a series of simple examples that in some commonly featured cases that this assumption is likely to be violated among inframarginal agents, i.e. the always- and never-takers. This violation of the exclusion restriction will generally confound the LATE interpretation of the associated IV results. We discuss potential adjustments to IV estimates in the presence of this bias.

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Document Object Identifier (DOI): 10.3386/w21391

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