David Lee, the Chemical Bank Chairman's Professor of Economics and Public Affairs, Princeton School of Public and International Affairs, and his co-authors Justin McCrary, Marcelo J. Moreira, and Jack Porter introduce the tF critical value function for single variable instrumental variables estimation.
Valid t-Ratio Inference for IV
In the single-IV model, researchers commonly rely on t-ratio-based inference, even though the literature has quantified its potentially severe large-sample distortions. Building on Stock and Yogo (2005), we introduce the tF critical value function, leading to a standard error adjustment that is a smooth function of the first-stage F-statistic. For one-quarter of specifications in 61 AER papers, corrected standard errors are at least 49 and 136 percent larger than conventional 2SLS standard errors at the 5 percent and 1 percent significance levels, respectively. tF confidence intervals have shorter expected length than those of Anderson and Rubin (1949), whenever both are bounded.