ECON 151 Lecture Notes - Lecture 14: Instrumental Variable, Dependent And Independent Variables, Regression Dilution
11 Nov 2020
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Document Summary
The structural model is the model of interest. A, ability, is unobserved therefore included in the error term ; A is correlated with s and explains w; A is endogeneous and therefore biases 1 (and 0) A causes the structural model to be biased or non-identified. I is an error term that respect the 0cm assumption i. e. e( |s) = 0. Tips: here endogenous means that part of the error term and correlated with at least one explanatory variable. Relevance/first stage assumption: z is strongly correlated with s, i. e. e(s|z) = 0 and possibly as large as possible; Independence/exogeneity assumption: z is not correlated with a, Si = 0 + 1zi + i (7) > 0 is a test of the relevance assumption . Importantly, the independence/exogeneity assumption cannot be rigorously tested and should be assume or discussed. Typically, iv are rare and hard to identify. Ability is not correlated with the explanatory variable.
