Friends don't let Friends do IV

Just don't do it. And if you must do it, dear God please don't do it with a Arellano-Bond type dynamic panel model (it's the worst, Jerry).

Here are the problems.

First of all, no matter what you may have read or been taught, identification is always and everywhere an ASSUMPTION. You cannot prove your IV is valid.

Second, no matter what you may have read or been taught, the family of Sargan-type tests are tests of OVER-IDENTIFICATION, not identification. You can "pass" the test and still not achieve valid identification.

Third, passing the tests, useless though they are, in any realistic fashion does not mean failing to reject the null at the .05 or even the .10 level.

Really!

The reason why is that our worry is we might fail to reject a false null. This is type II error. Choosing .05 essentially MAXIMIZES the chances of committing a type II error (minimizes the power of the test). I'd like to see p-values on the order of at least .25 to .30 (or higher).

Since identification is done by assumption, theory becomes super-important. The right way to do this in my view is by recognizing that the equation you seek to estimate is part of a system and the properties of that system will let you know whether identification is achievable or not.

If not, too bad. Estimate a reduced form and be happy.

I pretty much refuse to let my grad students go on the market with an IV in the job market paper. No way, no how. Even the 80 year old deadwoods in the back of the seminar room at your job talk know how to argue about the validity of your instruments. It's one of the easiest ways to lose control of your seminar.

We've had really good luck placing students who used Diff in diff (in diff), propensity score matching, synthetic control, and even regression discontinuity. All of these approaches have their own problems, but they are like little grains of sand compared to the boulder-sized issues in IV.

Florida or Ohio?

People, here's the headline:

Police on the Hunt for Serial Pooper

So I gotta ask, where do you think the Hunt is happening, Florida or Ohio?

Hat tip to @willafriedman

How do you work this thing?

Look everyone, another Sochi toilet fail:

People, if crap like this can (can't?) happen, why do they even have a super-human dictator at all?

What do Anthony Davis and I have in common?

A unibrow?

No, not yet at least.

A desire to get as far away from Coach Cal as possible?

Hmmm, maybe

That we serve as unpaid labor for a cartel that makes many millions every year?

Ding ding ding! We have a winner.

Anthony of course was a prisoner of the NBA rule that players cannot enter the League until a year after their high school class graduates. He spent the last year making millions for the University of Kentucky, ESPN, and the NCAA in return for room & board.

I of course am an idiot! As the Economist points out:

In 2011 Elsevier, the biggest academic-journal publisher, made a profit of £768m ($1.2 billion) on revenues of £2.1 billion. Such margins (37%, up from 36% in 2010) are possible because the journals’ content is largely provided free by researchers, and the academics who peer-review their papers are usually unpaid volunteers.

I have published in several Elsevier journals (Journal of Monetary Economics, Journal of Development Economics, Journal of Economic Behavior & Organization, Journal of International Money & Finance, European Journal of Political Economy) and referee frequently for them and many other Elsevier outlets.

In my defense, I do macro and development. the JME and the JDE are the top outlets for my work.

At least Elsevier could hold some kind of tournament and let the winning researchers wear giant t-shirts and cut down the nets!

Food Stamps

Work incentives and the food stamp program, Hilary Williamson Hoynes & Diane Whitmore Schanzenbach
Journal of Public Economics, February 2012, Pages 151-162

Abstract: Labor supply theory makes strong predictions about how the introduction or expansion of a social welfare program impacts work effort. Although there is a large literature on the work incentive effects of AFDC and the EITC, relatively little is known about the work incentive effects of the Food Stamp Program and none of the existing literature is based on quasi-experimental methods. We use the cross-county introduction of the program in the 1960s and 1970s to estimate the impact of the program on the extensive and intensive margins of labor supply, earnings, and family cash income. Consistent with theory, we find reductions in employment and hours worked when food stamps are introduced. The reductions are concentrated among families headed by single women.

Nod to Kevin Lewis

The uncensored econometrician

Yesterday in econometrics I, a student asked me "how do you know if you have an endogeneity problem?"

My reply:

"When you are reading the referee report on your paper and it says that some of your explanatory variables are 'clearly endogenous' and require instrumentation!"

Then another student asked, "how do you know you've solved your endogeneity problem?"

Me: "When you get the letter from the journal editor saying that your paper is accepted for publication".