Lee's paper "Valid t-Ratio Inference for IV" is published in AER

Oct. 3, 2022

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.