Identification of the Direction of a Causal Effect by Instrumental Variables

Abstract

This article provides a strategy to identify the existence and direction of a causal effect in a generalized nonparametric and nonseparable model identified by instrumental variables. The causal effect concerns how the outcome depends on the endogenous treatment variable. The outcome variable, treatment variable, other explanatory variables, and the instrumental variable can be essentially any combination of continuous, discrete, or “other” variables. In particular, it is not necessary to have any continuous variables, none of the variables need to have large support, and the instrument can be binary even if the corresponding endogenous treatment variable and/or outcome is continuous. The outcome can be mismeasured or interval-measured, and the endogenous treatment variable need not even be observed. The identification results are constructive, and can be empirically implemented using standard estimation results.