The Economics of Exclusion Restrictions in IV Models
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.
I thank Dan Black, Alex Gelber, Jeff Grogger, Patrick Kline, Jens Ludwig, Aprajit Mahajan, Ofer Malamud, Bruce Meyer, Matthew Notowidigdo and Jim Sallee for helpful comments. The views expressed herein are those of the author and do not necessarily reflect the views of the National Bureau of Economic Research.