Class 14: Instrumental Variables Part I

Today we’ll formally introduce instrumental variables and discuss some of the thorny issues associated with IV in practice (namely, testing for instrument validity and interpreting the results).

Objectives

• Understand the concept of instrumental variables and how they can be used to estimate causal effects
• List and explain the key assumptions for a “good” instrument
• Define and explain a local average treatment effect

Activities

• Continue work with the CDC Tax Burden on Tobacco data
• Data simulation and practical issues with IV