Title

Valid t-ratio Inference for IV

Author(s)

David S. Lee David Lee (Princeton University)

Justin McCrary Justin McCrary (Columbia University)

Marcelo J. Moreira Marcelo Moreira (Getulio Vargas Foundation)

Jack R. Porter Jack Porter (University of Wisconsin-Madison)

Abstract

In the single-IV model, researchers commonly rely on t-ratio-based inference, even though the literature has quantified its potentially severe large-sample distortions. Building on the approach for correcting inference of Stock and Yogo (2005), we introduce the tF critical value function, leading to a minimized standard error adjustment factor that is a smooth function of the first-stage F-statistic. Applying the correction to a sample of 61 AER papers leads to a 25 percent increase in standard errors, on average. tF confidence intervals have shorter expected length than those of Anderson and Rubin (1949), whenever both are bounded intervals.

Creation Date

2021-08

Section URL ID

Paper Number

2021-69

URL

https://www.princeton.edu/~davidlee/wp/w29124.pdf

File Function

Jel

C01,C1,C26,C36

Keyword(s)

Econometrics, Instrumental Variables

Suppress

false

Series

13