Journal of Political Economy Vol. 132 No. 7 2024
Granular Instrumental Variables
Abstract
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.
- DOI
- 10.1086/728743
- Volume
- 132
- Issue
- 7
- Pages
- 2274-2303
- Language
- en
- Sources
- bibtex:phds-export.bib openalex crossref