8 November 2005
In a recent presentation at Harvard, Caroline Hoxby outlined a paper-in-process on estimating the causal impact of higher education on economic growth in the US states (Aghion, Boustan, Hoxby and Vandenbussche (ABHV) "Exploiting States' Mistakes to Identify the Causal Impact of Higher Education on Growth", draft paper August 6, 2005).
ABHV's paper is interesting for the model and results, and you should read it to get the full story. But the paper is also intersting because of the instrument used to get around the endogeneity of education spending (where rich states spend more on higher education).
The basic idea is as follows: politicians are motivated to channel pork to their constituents in return for support. They do so through appropriations committees that can disburse "earnmarked" funds to research-type education. Observing that the membership of these committees is to a large extent random, ABHV have an instrument for research spending (and more instruments for spending on other types of education) and proceed to estimate the causal effect of education on growth. So this paper employs what could be called a political instrument. Of course there are plenty of other classes of IV's such as natural events (rainfall or natural disasters) etc. But an instrument is only partly distinguished by its ability to fulfill the formal requirements. There's also plenty of scope for creativity.
The IQSS Social Science Statistics blog is soliciting suggestions and requests for instruments: send your favorite IV and its application. Or tell our readers what you always wanted to get instrumented and see if someone comes up with a suggestion.