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Instrumental Variables Estimation

Assignment Brief

Answer both questions. Assignments should be word processed: 12pt font size, with 1.5 or double line spacing. Word limit: 4000 words (excluding tables and references). Each question weighs 50% of the final mark. The two questions need to be written in two separate depend essay (2000 words each question). The format is written in standard essay format, including introduction,literature review,main body,conclusion,bibliography. Repetition rate not higher than 5%(exclude bibliography). Once again remind, two questions need to be written in two separate essay, one essay requires 2000 words (excluding tables and references).

Questions:

  1. Taking an example of analysis using Instrumental Variables Estimation from the literature on economic development, critically evaluate the extent to which this identification strategy is convincing for the case you have chosen.
  2. Explain and assess the advantages and limitations of identification strategies based on Difference-in-Differences, drawing on one or more examples from development economics research.

Sample Paper Preview

Question 1

Taking an example of analysis using Instrumental Variables Estimation from the literature on economic development, critically evaluate the extent to which this identification strategy is convincing for the case you have chosen.

Introduction

According to Moffitt (2005), instrumental variable (IV) methods, which are most commonly applied in field economics, have the ability to remove endogeneity bias in regression estimates. The major strategy in IV estimation is to find an “instrument” or variable which generates an exogenous variation in a particular predictor of interest. This variation can then be applied in cleanly estimating the relationship between the predictor and the outcome. As proposed by Gennetian et al. (2005), the IV estimation technique has been applied occasionally mainly because of the challenges that are involved in the identification of viable instruments. In this study, we will select a case on economic development that has been conducted using the IV estimation technique and then conducts a critical analysis of the extent to this particular identification strategy is appealing for that particular case.

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Question 2

Explain and assess the advantages and limitations of identification strategies based on Difference-in-Differences, drawing on one or more examples from development economics research.

Introduction

Difference-in-differences estimation is a common empirical estimation technique often applied in economics. According to Puhani (2012), this technique may be described as a quasi-experimental model that applies longitudinal data from control and treatment groups in order to acquire a suitable counterfactual to be used in estimating a causal effect. Athey and Imbens (2006) note that the difference-in-differences technique is usually used in estimating the influence of a specific treatment or intervention (for example, the implementation of a particular major program, and passage or enactment of a law or a policy) by making a comparison regarding the changes in the outcomes over time between that population that has been enrolled to take part in the program (also called the intervention group or treatment group) and the population that has not taken part in the program (also referred to as the control group). The different-in-difference technique is often applied in observational settings where one cannot assume exchangeability between the control and the treatment groups. This technique largely depends on a less stringent exchangeability assumption, in other words, in the absence of the intervention or the treatment, all the unobserved differences occurring between the control and the treatment groups will be similar over time (Abadie, 2005). Therefore, the difference-in-differences technique is a highly useful method to apply in cases when the randomization of individual level cannot be achieved. As such, this paper will primarily focus on assessing the difference-in-differences estimation technique, providing various advantages and disadvantages of the technique by drawing from various examples from development economics research conducted using this technique.

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