Spatial interdependence and instrumental variable models Academic Article uri icon


  • AbstractInstrumental variable (IV) methods are widely used to address endogeneity concerns. Yet, a specific kind of endogeneity spatial interdependence is regularly ignored. We show that ignoring spatial interdependence in the outcome results in asymptotically biased estimates even when instruments are randomly assigned. The extent of this bias increases when the instrument is also spatially clustered, as is the case for many widely used instruments: rainfall, natural disasters, economic shocks, and regionally- or globally-weighted averages. Because the biases due to spatial interdependence and predictor endogeneity can offset, addressing only one can increase the bias relative to ordinary least squares. We demonstrate the extent of these biases both analytically and via Monte Carlo simulation. Finally, we discuss a general estimation strategy S-2SLS that accounts for both outcome interdependence and predictor endogeneity, thereby recovering consistent estimates of predictor effects.

published proceedings


author list (cited authors)

  • Betz, T., Cook, S. J., & Hollenbach, F. M.

complete list of authors

  • Betz, Timm||Cook, Scott J||Hollenbach, Florian M

publication date

  • January 1, 2020 11:11 AM