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A Note on Proxy Variables and Instrument Variable Regression
Dalarna University, School of Technology and Business Studies, Statistics.ORCID iD: 0000-0003-4378-9593
2015 (English)Report (Other academic)
Abstract [en]

This is a note about proxy variables and instruments for identification of structural parameters in regression models. We have experienced that in the econometric textbooks these two issues are treated separately, although in practice these two concepts are very often combined. Usually, proxy variables are inserted in instrument variable regressions with the motivation they are exogenous. Implicitly meaning they are exogenous in a reduced form model and not in a structural model. Actually if these variables are exogenous they should be redundant in the structural model, e.g. IQ as a proxy for ability. Valid proxies reduce unexplained variation and increases the efficiency of the estimator of the structural parameter of interest. This is especially important in situations when the instrument is weak. With a simple example we demonstrate what is required of a proxy and an instrument when they are combined. It turns out that when a researcher has a valid instrument the requirements on the proxy variable is weaker than if no such instrument exists

Place, publisher, year, edition, pages
Borlänge: Högskolan Dalarna, 2015.
Working papers in transport, tourism, information technology and microdata analysis, ISSN 1650-5581 ; 2015:04
Keyword [en]
Instrument variable regression, Proxy variables
National Category
Probability Theory and Statistics
Research subject
Complex Systems – Microdata Analysis
URN: urn:nbn:se:du-17295OAI: diva2:805850
Available from: 2015-04-16 Created: 2015-04-16 Last updated: 2016-08-16Bibliographically approved

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Wikström, Daniel
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