Valid t-Ratio Inference for IV
David S. Lee, Justin McCrary, Marcelo J. Moreira, Jack Porter
American Economic Review · 2022 · Volume 112 · Issue 10
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 Stock and Yogo (2005), we introduce the tF critical value function, leading to a standard error adjustment that is a smooth function of the first-stage F -statistic. For one-quarter of specifications in 61 AER papers, corrected standard errors are at least 49 and 136 percent larger than conventional 2SLS standard errors at the 5 percent and 1 percent significance levels, respectively. tF confidence intervals have shorter expected length than those of Anderson and Rubin (1949), whenever both are bounded.
Keywords
Estimation: General, Single Equation Models: Single Variables: Instrumental Variables (IV) Estimation
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