Criteria for instrumental variables
In this section, we will explore the foundational principles underpinning the criteria to be an instrumental variable. We will be emphasizing the critical assumptions of relevance, exogeneity, and exclusion restriction. Let’s look at these in more detail.
Relevance of the instrumental variable
Using an instrumental variable helps to identify causal relationships without bias. The instrumental variable, 
, influences the treatment variable 
and highlights its effects on the outcome 
without directly affecting .
The key conditions are as follows:
must influence - Exclusion restriction:
should not directly affect except through - Independence condition: should not be related to any unobserved factors that affect
These conditions help to avoid confounding variables and ensure a clear causal effect between 
and 
. This strategy is useful when dealing with non-experimental data to reveal cause and effect accurately...
