Type of Document	Dissertation
Author	Souri, Davood
Author's Email Address	dsouri@vt.edu
URN	etd-08232004-180017
Title	Theoretical and Applied Essays on the Instrumental Variable Mthod
Degree	PhD
Department	Economics
Advisory Committee	Advisor Name Title Djavad Salehi_Isfahani Committee Chair Bradford Mills Committee Member Dennis Yang Committee Member G.Geoffrey Vining Committee Member Richard Ashley Committee Member
Keywords	Weak instruments Instrument relevancy Specification Return to schooling Natural experiment Instrumental variable method
Date of Defense	2004-08-23
Availability	restricted
Abstract This dissertation is intended to provide a statistical foundation for the IV models and shed lights on a number of issues related to the IV method. The first chapter shows that the theoretical Instrumental Variable model can be derived by reparameterization of a well-specified statistical model defined on the joint distribution of the involved random variables as the actual (local) data generation process. This reveals the covariance structure of the error terms of the usual theory-driven instrumental variable model. The revealed covariance structure of the IV model have important implications, particularly, for designing simulation studies. Monte Carlo simulations are used to reexamine the \citeasnoun{nelsa1990} findings regarding the performance of IV estimators when the instruments are weak. The results from the simulation exercises indicate that the sampling distribution of $\hat{\beta}_{IV}$ is concentrated around $\hat{\beta}_{OLS}$. The second chapter considers the underlying joint distribution function of the instrumental variable (IV) model and presents an alternative definition for the exogenous and relevant instruments. The paper extracts a system of independent and orthogonal equations that covers up a non-orthogonal structural model and argues that the estimated IV regression is well-specified if the underlying system of equations is well-specified. It proposes a new instrument relevancy measure that does not suffer from the first-stage $R^2$ deficiencies. Third chapter argues the application of the IV method in estimation of models with omitted variable. The paper considers the implicit parametrization of statistical models and presents five conditions for an appropriate instruments. Two of them are empirically measurable and can be tested. This improves the literature by adding one more objective criterion for the selection of instruments. This chapter applies the IV method to estimate the rate of return to education in Iran. It argues that the education of two cohorts of Iranians was delayed or cut short by the Cultural Revolution. Therefore, the Cultural Revolution, as an exogenous shock to the supply of education, establishes the year of birth as the exogenous and relevant instrument for education. Using the standard Mincerian earnings function with control for experience, ethnicity, location of residence and sector of employment, the instrumental variable estimate of the return to schooling is equal to 5.6\%. The estimation results indicate that the Iranian labor market values degrees more than years of schooling.
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