The method of instrumental variables (IV) allows estimation of the causal effect of a treatment when the treatment is not randomly assigned. IV requires that the researcher identify a variable that affects the treatment status but has no other impact on the outcome. This variable is referred to as an instrument or an instrumental variable. The instrument induces variation in the treatment status that isn’t attributable to the unobserved characteristics of the subject, allowing the researcher to isolate the causal effect of the treatment.

This entry provides an example of how IV works, followed by a more detailed discussion of IV methodology and its assumptions. The entry then discusses IV in the context where the impact of a treatment differs across individuals and illustrates how IV ...