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  5. Avoiding Invalid Instruments and Coping with Weak Instruments

Journal of Economic Perspectives

ISSN 0895-3309 (Print) | ISSN 1944-7965 (Online)

Avoiding Invalid Instruments and Coping with Weak Instruments

  • Michael P. Murray
Journal of Economic Perspectives
vol. 20, no. 4, Fall 2006
(pp. 111–132)
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Abstract

Archimedes said, "Give me the place to stand, and a lever long enough, and I will move the Earth." Economists have their own powerful lever: the instrumental variable estimator. The instrumental variable estimator can avoid the bias that ordinary least squares suffers when an explanatory variable in a regression is correlated with the regression's disturbance term. But, like Archimedes lever, instrumental variable estimation requires both a valid instrument on which to stand and an instrument that isn't too short (or "too weak"). This paper briefly reviews instrumental variable estimation, discusses classic strategies for avoiding invalid instruments (instruments themselves correlated with the regression's disturbances), and describes recently developed strategies for coping with weak instruments (instruments only weakly correlated with the offending explanator).

Citation

Murray, Michael, P. 2006. "Avoiding Invalid Instruments and Coping with Weak Instruments." Journal of Economic Perspectives, 20 (4): 111–132. DOI: 10.1257/jep.20.4.111

JEL Classification

  • C13 Estimation: General
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