Case Detail

Case Summary

Practical Regression: Causality and Instrumental Variables

Case Number: 7-112-010, Year Published: 2012

HBS Number: KEL644

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Key Concepts

Economics, Market Research, Statistical Methods

Abstract

This is the tenth in a series of lecture notes which, if tied together into a textbook, might be entitled “Practical Regression.” The purpose of the notes is to supplement the theoretical content of most statistics texts with practical advice based on nearly three decades of experience of the author, combined with over one hundred years of experience of colleagues who have offered guidance. As the title “Practical Regression” suggests, these notes are a guide to performing regression in practice.
This note uses the theory of "supplier-induced demand" from health economics to illustrate key issues including reverse causality, the role of instrumental variables in establishing causality, and the characteristics of good instruments.

Learning Objectives

Students will learn the following:
- The problem of reverse causality
- How instrumental variables help establish causality
- The properties of good instruments
- The mathematics underlying instrumental variable regression
- How to implement instrumental variable regression using Stata
- How to test for valid instruments

Number of Pages: 4

Extended Case Information

Teaching Areas: Finance