Explain the concept of instrumental variables and their application in causal inference.
Instruction: Provide an example of how an instrumental variable could be used in an economic study to determine the causal impact of education on earnings.
Context: This question assesses the candidate's knowledge of instrumental variables, a technique used to estimate causal relationships when controlled experiments are not feasible. The example will help evaluate the candidate's ability to apply this concept in real-world scenarios, demonstrating their analytical and problem-solving skills.
Updated
Official answer available
Read the opening below, then unlock the full answer and practical guidance.
An instrumental variable changes treatment uptake while providing a credible way to separate that variation from confounding. I need relevance, independence from the relevant potential outcomes, and exclusion: the instrument affects the outcome only through the treatment...