Negative Control Falsification Tests for Instrumental Variable Designs

TL;DR

This paper analyzes the use of negative control-based falsification tests in instrumental variable designs, revealing their assumptions, limitations, and providing guidance for proper implementation.

Contribution

It characterizes negative control tests in IV settings, clarifies their assumptions, and offers practical guidance to improve their application.

Findings

Falsification tests check independence and exclusion restrictions.

Conventional tests may falsely flag valid IVs.

Guidance provided for correct implementation.

Abstract

The validity of instrumental variable (IV) designs is typically tested using two types of falsification tests. We characterize these tests as conditional independence tests between negative control variables -- proxies for unobserved variables posing a threat to the identification -- and the IV or the outcome. We describe the conditions that variables must satisfy in order to serve as negative controls. We show that these falsification tests examine not only independence and the exclusion restriction, but also functional form assumptions. Our analysis reveals that conventional applications of these tests may flag problems even in valid IV designs. We offer implementation guidance to address these issues.