Sensitivity analysis for inference in 2SLS/GMM estimation with possibly flawed instruments

Richard A. Ashley, Christopher Parmeter

Research output: Contribution to journalArticle

4 Scopus citations

Abstract

Credible inference requires attention to the possible fragility of the results (p values for key hypothesis tests) to flaws in the model assumptions, notably accounting for the validity of the instruments used. Past sensitivity analysis has mainly consisted of experimentation with alternative model specifications and with tests of over-identifying restrictions which actually presuppose instrument validity. We provide a feasible sensitivity analysis of two-stage least-squares and GMM estimation, quantifying the fragility/robustness of inference with respect to possible flaws in the exogeneity assumptions made, and also indicating which of these assumptions are most crucial. The method is illustrated via application to a well-known study of the education–earnings relationship.

Original languageEnglish (US)
Pages (from-to)1153-1171
Number of pages19
JournalEmpirical Economics
Volume49
Issue number4
DOIs
StatePublished - Dec 1 2015

Keywords

  • Flawed instruments
  • Instrumental variables
  • Invalid instruments
  • Robustness
  • Sensitivity analysis
  • Two-stage least squares

ASJC Scopus subject areas

  • Economics and Econometrics
  • Social Sciences (miscellaneous)
  • Mathematics (miscellaneous)
  • Statistics and Probability

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