Applied Nonparametric Instrumental Variables Estimation

Joel L. Horowitz*

*Corresponding author for this work

Research output: Contribution to journalArticle

63 Scopus citations

Abstract

Instrumental variables are widely used in applied econometrics to achieve identification and carry out estimation and inference in models that contain endogenous explanatory variables. In most applications, the function of interest (e.g., an Engel curve or demand function) is assumed to be known up to finitely many parameters (e.g., a linear model), and instrumental variables are used to identify and estimate these parameters. However, linear and other finite-dimensional parametric models make strong assumptions about the population being modeled that are rarely if ever justified by economic theory or other a priori reasoning and can lead to seriously erroneous conclusions if they are incorrect. This paper explores what can be learned when the function of interest is identified through an instrumental variable but is not assumed to be known up to finitely many parameters. The paper explains the differences between parametric and nonparametric estimators that are important for applied research, describes an easily implemented nonparametric instrumental variables estimator, and presents empirical examples in which nonparametric methods lead to substantive conclusions that are quite different from those obtained using standard, parametric estimators.

Original languageEnglish (US)
Pages (from-to)347-394
Number of pages48
JournalEconometrica
Volume79
Issue number2
DOIs
StatePublished - Mar 1 2011

Keywords

  • Eigenvalues
  • Endogenous variable
  • Ill-posed inverse problem
  • Instrumental variable
  • Linear operator
  • Nonparametric estimation

ASJC Scopus subject areas

  • Economics and Econometrics

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