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Granular Instrumental Variables

By: Contributor(s): Material type: Continuing resourceContinuing resourcePublication details: Journal of Political Economy; 2024Description: 2274-2303ISSN:
  • 0022-3808
Subject(s): Online resources: Summary: We develop a new method to construct instruments in a broad class of economic environments. In the economies we study, a few large firms, industries, or countries account for an important share of economic activity. Idiosyncratic shocks to these large players significantly affect aggregate outcomes and are valid instruments. We provide a methodology to extract these idiosyncratic shocks to create granular instrumental variables (GIVs), which are size-weighted sums of idiosyncratic shocks. We show how GIVs enable us to estimate causal parameters, such as elasticities and multipliers, and are applicable in a broad range of empirically relevant settings.
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Article Index Article Index Dr VKRV Rao Library Vol. 132, No. 7 Not for loan AI735

We develop a new method to construct instruments in a broad class of economic environments. In the economies we study, a few large firms, industries, or countries account for an important share of economic activity. Idiosyncratic shocks to these large players significantly affect aggregate outcomes and are valid instruments. We provide a methodology to extract these idiosyncratic shocks to create granular instrumental variables (GIVs), which are size-weighted sums of idiosyncratic shocks. We show how GIVs enable us to estimate causal parameters, such as elasticities and multipliers, and are applicable in a broad range of empirically relevant settings.

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