DP15319 Non-Random Exposure to Exogenous Shocks: Theory and Applications

Author(s): Kirill Borusyak, Peter Hull
Publication Date: September 2020
Date Revised: January 2021
Keyword(s): Identification strategies, instrumental variables, market access, Natural Experiments, Network spillovers, Randomization inference, Shift-share IV, Simulated instruments, Treatment effects
JEL(s): C21, C26, F14, I13, R40
Programme Areas: Labour Economics, International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=15319

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.