Introduction to instrumental variables

First, let’s lay the foundation by defining instrumental variables and illustrating their importance in tackling endogeneity and omitted variable biases. Wait – we will learn about these new terms in depth in a minute. Through engaging examples and clear explanations, you will be acquainted with such new concepts and their critical role in identifying true causal effects. This section sets the stage for a deeper exploration of how instrumental variables can illuminate the path to causality in complex datasets, providing a prelude to the practical applications and methodologies that follow.

The concept of instrumental variables

Instrumental variables offer a sophisticated approach to infer causal relationships in situations laden with confounding or when a direct causal path cannot be feasibly manipulated. To qualify as an instrumental variable, a variable must satisfy three core criteria:

• They should influence the treatment...