Understanding Instrumental Variables in Models with Essential Heterogeneity

This project was supported by NSF grants 0241858, 0099195, and 9709873, and NIH grant R01-HD043411, and a grant from the American Bar Foundation. An early version of this paper was presented as the Review of Economics and Statistics Lecture at Harvard, April 2001; at Princeton University, December 2004; at a workshop on Causality in Economics, Oxford University, August 2005; and at the World Congress of the Econometric Society, August 2005. We thank audience participants at those seminars as well as students in Economics 350 at the University of Chicago in Winter Quarter 2005 for stimulating comments and our discussants at the 2001 seminar, Larry Katz and Robert Moffitt, for helpful comments. We have received additional helpful comments from the editor, Jim Stock and an anonymous referee. Bo Honore, Derek Neal, Weerachart Kilenthong, Sergey Mityakov, Rodrigo Pinto, Jean-Marc Robin and Jora Stixrud provided helpful comments on various drafts. Supplementary material for this paper is available at the website http;//jenni.uchicago.edu/underiv. The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research.