MIMIC modelling with instrumental variables: A 2SLS-MIMIC approach

TL;DR

This paper introduces a novel 2SLS estimator for MIMIC models to address issues of reverse causality and identification, supported by theory, simulations, and an empirical application to older workers' precariousness.

Contribution

It develops a 2SLS-based estimation method for MIMIC models, enabling analysis with reverse causality and providing theoretical, simulation, and empirical validation.

Findings

The 2SLS-MIMIC estimator is consistent and asymptotically normal.

Simulation results demonstrate improved estimation accuracy.

Empirical application reveals multidimensional aspects of precarious work.

Abstract

Multiple Indicators Multiple Causes (MIMIC) models are type of structural equation models, a theory-based approach to confirm the influence of a set of exogenous causal variables on the latent variable, and also the effect of the latent variable on observed indicator variables. In a common MIMIC model, multiple indicators reflect the underlying latent variables/factors, and the multiple causes (observed predictors) affect latent variables/factors. Basic assumptions of MIMIC are clearly violated in case of a variable being both an indicator and a cause, i.e. in the presence of reverse causality. Furthermore, the model is then unidentified. To resolve the situation, which can arise frequently, and as MIMIC estimation lacks closed form solutions for parameters we utilize a version of Bollen's (1996) 2SLS estimator for structural equation models combined with J\"oreskog (1970)'s method of the analysis of covariance structures to derive a new, 2SLS estimator for MIMIC models. Our 2SLS empirical estimation is based on static MIMIC specification but we point also to dynamic/error-correction MIMIC specification and 2SLS solution for it. We derive basic asymptotic theory for static 2SLS-MIMIC, present a simulation study and apply findings to an interesting empirical case of estimating precarious status of older workers (using dataset of Survey of Health, Ageing and Retirement in Europe) which solves an important issue of the definition of precarious work as a multidimensional concept, not modelled adequately so far.