Discussion Paper Details

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Title: Non-Random Exposure to Exogenous Shocks: Theory and Applications

Author(s): Kirill Borusyak and Peter Hull

Publication Date: September 2020

Keyword(s): Identification strategies, instrumental variables, market access, Natural Experiments, Network spillovers, Randomization inference, Shift-share IV, Simulated instruments and Treatment effects

Programme Area(s): International Trade and Regional Economics and Labour Economics

Abstract: We develop new tools for estimating the causal effects of treatments or instruments that combine multiple sources of variation according to a known formula. Examples include treatments capturing spillovers in social and transportation networks, simulated instruments for policy eligibility, and shift-share instruments. We show how exogenous shocks to some, but not all, determinants of such variables can be leveraged while avoiding omitted variables bias. Our solution involves specifying counterfactual shocks that may as well have been realized and adjusting for a summary measure of non-randomness in shock exposure: the average treatment (or instrument) across such counterfactuals. We further show how to use shock counterfactuals for valid finite-sample inference, and characterize the valid instruments that are asymptotically efficient. We apply this framework to address bias when estimating employment effects of market access growth from Chinese high-speed rail construction, and to boost power when estimating coverage effects of expanded Medicaid eligibility.

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Bibliographic Reference

Borusyak, K and Hull, P. 2020. 'Non-Random Exposure to Exogenous Shocks: Theory and Applications'. London, Centre for Economic Policy Research.