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Generalized instrumental variable models

Authors: Andrew Chesher and Adam Rosen
Date: 23 January 2014
Type: cemmap Working Paper, CWP04/14
DOI: 10.1920/wp.cem.2014.0414


The ability to allow for flexible forms of unobserved heterogeneity is an essential ingredient in modern microeconometrics. In this paper we extend the application of instrumental variable (IV) methods to a wide class of problems in which multiple values of unobservable variables can be associated with particular combinations of observed endogenous and exogenous variables. In our Generalized Instrumental Variable (GIV) models, in contrast to traditional IV models, the mapping from unobserved heterogeneity to endogenous variables need not admit a unique inverse. The class of GIV models allows unobservables to be multivariate and to enter non-separably into the determination of endogenous variables, thereby removing strong practical limitations on the role of unobserved heterogeneity. Important examples include models with discrete or mixed continuous/discrete outcomes and continuous unobservables, and models with excess heterogeneity where many combinations of different values of multiple unobserved variables, such as random coefficients, can deliver the same realizations of outcomes. We use tools from random set theory to study identification in such models and provide a sharp characterization of the identified set of structures admitted. We demonstrate the application of our analysis to a continuous outcome model with an interval-censored endogenous explanatory variable.

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New version:
Andrew Chesher and Adam Rosen October 2015, Characterizations of identified sets delivered by structural econometric models, cemmap Working Paper, CWP63/15, Institute for Fiscal Studies
Previous version:
Andrew Chesher and Adam Rosen August 2013, Generalized instrumental variable models, cemmap Working Paper, CWP43/13, Institute for Fiscal Studies

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