Topic

Wald Estimator:

• Instrumental variable when X (or D in this example) and Z are

dummy variables

• Policy evaluation ‘treatment effect’; quasi-natural experiment

Sources of endogeneity

• Measurement errors in X

• Reverse causality/ Simultaneity

 W.)

W),

W.
 Random
Assignment “Z”

Population

Group received Group not

assignment received
(Z=1) assignment (Z=0)
Without Z,
X (or D) is a choice!

• Some switch to X=1 • Some switch to X=1

‘complier’ ‘non-complier’
• Some stay at X=0 ‘non- • Some stay at X=0
complier ‘complier
Prob(X=1, given z=1) Prob(X=1, given z=0)

E(Y, given z=1) E(Y, given z=0)

 W
D is a dummy variable.

,W] W
Z is also a dummy variable.
 (W,Z =1) (W,Z =1)
𝛼ෝ (𝑊)
(W,Z =1) (W,Z =0)

W,Z
W,Z

W,
Z

W,Z
Note: Eligibility= Z ;
Veteran Status = D;
Earnings = Y
W, W,Z
Z
When e is uncorrelated with X and with u

When e is corrected with X and with u