Negative Controls for Instrumental Variable Designs

Author:

Oren Danieli, Daniel Nevo, Itai Walk, Bar Weinstein, Dan Zeltzer

Keyword:

Economics, Econometrics, Econometrics (econ.EM), Methodology (stat.ME)

journal:

date:

2023-12-25 00:00:00

Abstract

Studies using instrumental variables (IV) often assess the validity of their identification assumptions using falsification tests. However, these tests are often carried out in an ad-hoc manner, without theoretical foundations. In this paper, we establish a theoretical framework for negative control tests, the predominant category of falsification tests for IV designs. These tests are conditional independence tests between negative control variables and either the IV or the outcome (e.g., examining the ``effect'' on the lagged outcome). We introduce a formal definition for threats to IV exogeneity (alternative path variables) and characterize the necessary conditions that proxy variables for such unobserved threats must meet to serve as negative controls. The theory highlights prevalent errors in the implementation of negative control tests and how they could be corrected. Our theory can also be used to design new falsification tests by identifying appropriate negative control variables, including currently underutilized types, and suggesting alternative statistical tests. The theory shows that all negative control tests assess IV exogeneity. However, some commonly used tests simultaneously evaluate the 2SLS functional form assumptions. Lastly, we show that while negative controls are useful for detecting biases in IV designs, their capacity to correct or quantify such biases requires additional non-trivial assumptions.

PDF: Negative Controls for Instrumental Variable Designs.pdf