IV and Structure

IV and Structure - NBER WORKING PAPER SERIES COMPARING IV WITH STRUCTURAL MODELS WHAT SIMPLE IV CAN AND CANNOT IDENTIFY James J Heckman Sergio

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Unformatted text preview: NBER WORKING PAPER SERIES COMPARING IV WITH STRUCTURAL MODELS: WHAT SIMPLE IV CAN AND CANNOT IDENTIFY James J. Heckman Sergio Urzua Working Paper 14706 http://www.nber.org/papers/w14706 NATIONAL BUREAU OF ECONOMIC RESEARCH 1050 Massachusetts Avenue Cambridge, MA 02138 February 2009 We thank Donna Gilleskie, Daniel Schmierer, Greg Veramendi and an anonymous referee for helpful comments. This project was supported by NSF grant SES-0241858, NIH grant R01-HD043411, a grant from the Geary Institute, University College Dublin, and a grant from the American Bar Foundation. The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research. © 2009 by James J. Heckman and Sergio Urzua. All rights reserved. Short sections of text, not to exceed two paragraphs, may be quoted without explicit permission provided that full credit, including © notice, is given to the source. Comparing IV With Structural Models: What Simple IV Can and Cannot Identify James J. Heckman and Sergio Urzua NBER Working Paper No. 14706 February 2009 JEL No. C31 ABSTRACT This paper compares the economic questions addressed by instrumental variables estimators with those addressed by structural approaches. We discuss Marschak's Maxim: estimators should be selected on the basis of their ability to answer well-posed economic problems with minimal assumptions. A key identifying assumption that allows structural methods to be more informative than IV can be tested with data and does not have to be imposed. James J. Heckman Department of Economics The University of Chicago 1126 E. 59th Street Chicago, IL 60637 and NBER [email protected] Sergio Urzua Northwestern University Department of Economics 2001 Sheridan Road #3225 Evanston, IL 60208 [email protected] 1 Introduction The primary question regarding the choice of an empirical approach to analyzing economic data should be What economic question does the analyst seek to answer? Explicit economic models make it easier to formulate and answer economic questions. Advocates of atheoretical approaches to analyzing economic data appeal to randomization as an ideal and invoke IV (or matching or regression discontinuity designs) as a surrogate for randomization. However, even perfectly executed randomizations do not answer all questions of economic interest. There are important examples where structural models produce more information about preferences than experiments. 1 A valid instrument is not guaranteed to identify parameters of economic interest when responses to choices vary among individuals, and these variations influence choices taken. 2 Different valid instruments answer different questions....
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This note was uploaded on 12/26/2011 for the course ECON 245a taught by Professor Staff during the Fall '08 term at UCSB.

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IV and Structure - NBER WORKING PAPER SERIES COMPARING IV WITH STRUCTURAL MODELS WHAT SIMPLE IV CAN AND CANNOT IDENTIFY James J Heckman Sergio

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