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Title:Linearity in instrumental variables estimation: Problems and solutions PDF Logo
Authors:Mogstad, Magne
Wiswall, Matthew
Issue Date:2010
Series/Report no.:Discussion paper series // Forschungsinstitut zur Zukunft der Arbeit 5216
Abstract:The linear IV estimator, in which the dependent variable is a linear function of a potentially endogenous regressor, is a major workhorse in empirical economics. When this regressor takes on multiple values, the linear specification restricts the marginal effects to be constant across all margins. This paper investigates the problems caused by the linearity restriction in IV estimation, and discusses possible remedies. We first examine the biases due to nonlinearity in the commonly used tests for non-zero treatment effects, selection bias, and instrument validity. Next, we consider three applications where theory suggests a nonlinear relationship, yet previous research has used linear IV estimators. We find that relaxing the linearity restriction in the IV estimation changes the qualitative conclusions about the relevant economic theory and the effectiveness of different policies.
Subjects:linear model
variable treatment intensity
nonlinearity
instrumental variables
JEL:C31
C14
Document Type:Working Paper
Appears in Collections:IZA Discussion Papers, Forschungsinstitut zur Zukunft der Arbeit (IZA)

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