In order to reduce the “ability bias,” Angrist and Krueger (1991) used quarter o
ID: 3218219 • Letter: I
Question
In order to reduce the “ability bias,” Angrist and Krueger (1991) used quarter of birth as an instrumental variable for years of education – i.e., the instrument equals one if the person was born in the first quarter of the year and zero, otherwise. i) Under what conditions is the instrumental variable used valid? ii) How might you examine its validity? iii) They found that individuals born in the first quarter of the year had 0.11 less years of education than those born in the last three quarters of the year; and that they had 1.1 percent lower earnings as adults. From these numbers, calculate the instrumental variables estimate of the effect of an extra year of education on earnings.
Explanation / Answer
i) an instrument variable is valid if it is independent of its own occurence ut it causes changes in the dependent variable.
ii) if its mean in each period is independent of its previous occurance i.e. stationary in nature, or independent.