Nber Working Paper Series the Economics of Exclusion Restrictions in Iv Models

We explore a key underlying assumption, the exclusion restriction, commonly used in interpreting IV estimates in the presence of heterogenous treatment effects as a local average treatment effect (LATE). We show through a series of simple examples that in some commonly featured cases that this assumption is likely to be violated among inframarginal agents, i.e. the alwaysand never-takers. This violation of the exclusion restriction will generally confound the LATE interpretation of the associated IV results. We discuss potential adjustments to IV estimates in the presence of this bias. Damon Jones Harris School of Public Policy University of Chicago 1155 East 60th Street Chicago, IL 60637 and NBER [email protected] The Economics of Exclusion Restrictions in IV Models Damon Jones∗ University of Chicago and NBER