Instrumental Variable Method
Updated 2026-08-15
INTRODUCTION
English translation pending.
CORE DEFINITION
The instrumental variable method addresses endogeneity, the situation where the independent variable is correlated with the error term and the ordinary estimate is biased. An instrument is correlated with the independent variable but not with the error term, and two-stage estimation uses it to purge the independent variable of its endogenous part. When an experiment cannot be run, this is the way to approach a causal effect from observational data.
SCAFFOLDING EFFECT
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- Fix the endogeneity: name the reason the regressor is tied to the error before estimating. - Choose the instrument: find something correlated with the cause but not with the error. - Estimate in two stages: use the instrument to predict the cause, then use that prediction for the outcome.
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The part of the independent variable that is correlated with the error is the contaminated part, and the instrument identifies the clean part by moving only through it. Two-stage least squares replaces the actual variable with its instrument-predicted value, so the estimate no longer picks up the endogenous variation and the remaining bias is much smaller.
MINIMUM ACTION
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Source support: Explicit
- en.wikipedia.orghttps://en.wikipedia.org/wiki/Instrumental_variablesverified
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