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Testing instrument validity for LATE identification based on inequality moment constraints

abstract This paper proposes bootstrap tests for the validity of instrumental variables (IV) in just identified treatment effect models with endogeneity. We demonstrate that the IV assumptions required for the identification of the local average treatment effect (LATE) allow us to both point identify and bound the mean potential outcomes (i) of the always takers (those treated irrespective of the instrument) under treatment and (ii) of the never takers (never treated irrespective of the instrument) under non-treatment. The point identified means must lie within their respective bounds, which provides four testable inequality moment constraints for IV validity. Furthermore, we present simulations on the finite sample behavior of various tests and empirical applications to labor market and economic development data. Finally, we show how to increase testing power by imposing mean dominance assumptions and propose a method to check for effect homogeneity across subpopulations
   
type journal paper
   
keywords specification test, instrument, treatment effects, LATE, inequality moment constraints.
   
language English
kind of paper journal article
date of appearance 20-11-2011
journal Review of Economics & Statistics
publisher MIT Press (Cambridge, MA)
ISSN 0034-6535
number of issue forthcoming
page(s) NA
review double-blind review
   
citation Huber, M., & Mellace, G. (2011). Testing instrument validity for LATE identification based on inequality moment constraints. Review of Economics & Statistics(forthcoming), NA.