Valid t -ratio Inference for IV

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 sm...

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Bibliographic Details
Published in:The American economic review 2022-10, Vol.112 (10), p.3260-3290
Main Authors: Lee, David S., McCrary, Justin, Moreira, Marcelo J., Porter, Jack
Format: Article
Language:English
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Summary: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. (JEL C13, C26)
ISSN:0002-8282
DOI:10.1257/aer.20211063