Instrumented Difference-in-Differences with Heterogeneous Treatment Effects

Abstract

Many studies exploit variation in the timing of policy adoption across units as an instrument for treatment. This paper formalizes the underlying identification strategy as a staggered instrumented difference-in-differences (DID-IV). In this design, a Wald-DID estimand, which scales the DID estimand of the outcome by the DID estimand of the treatment, captures the cohort specific local average treatment effect on the treated (CLATT). We propose a credible estimation method in this design that is robust to treatment effect heterogeneity. We also provide simultaneous inference procedures based on the multiplier bootstrap. We illustrate the empirical relevance of our findings, estimating returns to schooling in the United Kingdom. In this application, the two-way fixed effects instrumental variable regression, the conventional approach to implement DID-IV designs, yields a negative estimate. By contrast, our estimation method indicates a substantial gain from schooling.

arXiv comment68 pages