2. Instruments and Panel Data
Isolate treatment variation through external shifts or within-unit change
2. Instruments and Panel Data
IV and fixed effects remove different sources of endogeneity. IV uses variation induced by an instrument; fixed effects remove time-invariant unit components. Neither is a generic “causal button.”
Learning outcomes
After this module, you should be able to:
- map first stage, reduced form and structural equation;
- defend relevance, assignment, exclusion and monotonicity separately;
- interpret a Wald/2SLS estimate as LATE under heterogeneous effects;
- diagnose weak instruments and use weak-identification-robust evidence;
- derive one- and two-way within transformations;
- identify time-varying confounding, dynamics and attrition that fixed effects do not remove.
Chapter route
- Instrumental Variables — which external variation moves treatment?
- Weak IV and LATE — whose effect and how fragile is the ratio?
- Panel Fixed Effects — what within-unit variation remains?
- Dynamic Panels and Limits — when lags, anticipation and short panels change the argument.
Prepare, work, follow up
- Prepare (60 min): draw one proposed instrument with every plausible path to the outcome; list one time-invariant and one time-varying confounder.
- Workshop (120 min): calculate a Wald estimate, stress a weak first stage, and reproduce a two-way within estimate.
- Follow up (75 min): write an exclusion-restriction defence and a panel threat table with evidence that could contradict each claim.
Postgraduate extension: report Anderson–Rubin or related weak-IV-robust inference and state the strict-exogeneity condition for the fixed-effects estimator.