Evaluating Instrument Validity using the Principle of Independent Mechanisms
Patrick F. Burauel; 24(176):1−56, 2023.
Abstract
The validity of instrumental variables for estimating causal effects is often controversial and typically justified through narratives. However, assessing critical assumptions can be challenging due to the involvement of unobserved variables. To address this issue, we propose a novel test that evaluates instrument validity without relying on Balke and Pearl’s inequality constraints, but instead utilizes the Principle of Independent Mechanisms, which asserts that causal models have a modular structure. Through Monte Carlo studies, we demonstrate the high accuracy of our approach. We also apply our method to two empirical studies. The first study supports Card’s (1995) narrative justification for the validity of college proximity as an instrument for educational attainment in his research on the financial returns to education. In the second study, we find no evidence to reject the validity of past savings rates as an instrument for estimating the causal effect of economic development on democracy (Acemoglu et al., 2008).
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