One Instrument to Rule Them All: The Bias and Coverage of Just-ID IV
We argue that in microeconometric applications, just-identified instrumental variables (IV) estimators are virtually unbiased and the usual inference strategies are likely adequate. Confidence interval undercoverage exceeds 5% only for endogeneity beyond that seen even when IV and OLS estimates differ by an order of magnitude. Three widely-cited applications are used to explain why endogeneity is likely low enough for IV estimates to be reliable. IV identification typically implies a first-stage sign restriction; most analysts probably screen their estimates accordingly. We show that screening on the estimated first stage sign halves median bias of conventional IV without reducing coverage.
We thank Ahmet Gulek and Luther Yap for expert research assistance. Thanks also go to Tim Armstrong, Isaiah Andrews, Brigham Frandsen, Guido Imbens, Mike Keane, Dave Lee, Whitney Newey, and Steve Pischke for helpful discussions and insightful comments. Kolesár acknowledges support by the Sloan Research Fellowship and by the National Science Foundation Grant SES-22049356. The views expressed here are our own. The views expressed herein are those of the authors and do not necessarily reflect the views of the National Bureau of Economic Research.