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Instrumental variables with treatment clusters

Abstract

Many policy evaluations include multiple unordered treatments. A common approach is to aggregate these treatments into clusters and apply instrumental variable (IV) methods at the treatment cluster level: The clusters are treated as binary treatments and the IV assumptions are invoked at the cluster level. This paper shows that IV with treatment clusters identifies a weighted average of local average treatment effects (LATEs) under a set of assumptions at the unclustered treatment level. When data on unclustered treatment choice is available, we propose testable necessary conditions for the causal interpretation of IV with treatment clusters. We illustrate our methods with empirical applications to the causal effects of fields of study aggregated into STEM and non-STEM clusters or eight broad study directions.

JEL: C36, C38, I23

Introduction

Many policy evaluations involve multiple unordered treatments, such as location decisions by firms or families [17] or student fields of study choices [1]. Researchers often aggregate these treatments into clusters. For instance, STEM and non-STEM programs (Ng and Riehl, 2024), Business and non-Business majors [3], or broad study directions [18], all consist of fields of study such as Physics or Finance. When treatment choice is endogenous, instrumental variable (IV) methods may be used to estimate a local average treatment effect (LATE) of a cluster of treatments. A STEM degree is then considered as a binary treatment choice, and the IV assumptions are invoked at the cluster level. However, individuals choose among treatments within the clusters, and therefore the instruments may induce changes in treatment take up across and within clusters. Hence, treatments have to be considered at the unclustered level as otherwise violations of the IV assumptions may stay undetected [34]. This raises the question of what parameter IV estimation at the cluster level is targeting, and under what conditions this parameter has a causal interpretation.

This paper studies IV estimation with treatments aggregated into clusters in a setting where both treatment and instrument are multi-valued unordered variables defined over the same support. We show that IV with clustered treatments identifies a weighted average of LATEs under a set of assumptions imposed at the unclustered treatment level. This weighted average includes the LATEs of all pairs of treatments across two clusters, and all instrument values associated with these clusters. The assumptions clarify which potential treatment choices have to be excluded, which does not directly follow from the IV assumptions of Imbens and Angrist [32] invoked at the cluster level. The assumptions are less strict than the IV assumptions required for identifying LATEs between the unclustered treatments [9]. We show that this result applies to settings with an arbitrary number of treatment clusters and a corresponding number of instruments. We also derive necessary conditions for a causal interpretation of the IV estimand with treatment clusters that are testable using data at the unclustered treatment level.

Treatment evaluation often considers clusters of treatments instead of the actual treatments for three reasons. First, administrative data on treatments with small enrollment numbers may not be disclosed due to privacy concerns. Second, the estimation of a large number of pairwise treatment effects may suffer from a lack of accuracy. Third, a large number of estimates may be less relevant if the policy is designed at a less fine-grained level. Our results are applicable to these settings, and help practitioners interpret the parameter targeted by an IV analysis at the cluster level, and justify the IV assumptions required for a causal interpretation of this parameter.

To illustrate the empirical relevance of our methods, we study the causal effect of clusters of fields of study on the number of study credit points. We have access to an administrative data set that includes four cohorts in the Portuguese public higher education system, from which we exploit a natural experiment to construct instruments in a fuzzy regression discontinuity design (RDD). We estimate treatment cluster effects using the STEM versus non-STEM classification and eight broad academic clusters defined according to the International Standard Classification of Education (ISCED).

To the best of our knowledge, we are the first to analyze the causal interpretation of the IV estimand with clusters of multiple unordered treatments. In a related setting, but with an ordered multivalued treatment, Angrist and Imbens [5]; Marshall [41]; Andresen and Huber [2] discuss the implications of binarising the multivalued treatment. Treatment clusters have also been discussed in combination with conditional independence assumptions. For instance, Lechner [38] discusses how to estimate the effect of treatment clusters in this setting. Heiler and Knaus [29] decompose treatment effect heterogeneity with two treatment clusters into heterogeneous treatment responses and heterogeneity in the actual treatment take up.

There is an extensive literature that aims to identify pairwise unclustered treatment effects in the presence of multiple unordered treatments. When using multiple instrumental variables, Behaghel et al. [7]; Kirkebøen et al. [36]; Dahl et al. [18]; Bhuller and Sigstad [9]; Heinesen et al. [30] allow each instrument to induce the choice of only one particular treatment, which is more restrictive than the assumptions required for an analysis at the treatment cluster level. Heckman and Pinto [28] and Pinto [47] discuss alternative assumptions for identifying multiple (local) average treatment effects with multiple discrete instruments. Lee and Salanié [40] and Mountjoy [43] discuss this setting with continuous instruments. Blackwell [10] discusses the identification of interaction effects between multiple treatments with binary instruments. Kline and Walters [37] consider the multiple treatment case with one instrument.

The paper proceeds as follows. Section 2 introduces the setting with IVs for multiple unordered treatments. Section 3 analyses IV estimation with treatment clusters. Section 4 derives testable necessary conditions for the identifying assumptions, and Section 5 extends the results to a fuzzy RDD. Section 6 illustrates the empirical relevance of our methods with fields of study as multiple unordered treatments. Section 7 concludes.

IV with multiple unordered treatments

Suppose we have a multi-valued unordered treatment D∈{1,…,J}D \in\{1,\ldots,J\} and a multi-valued unordered instrument Z∈{1,…,J}Z \in\{1,\ldots,J\}. Define the mutually exclusive binary treatments Dj=1[D=j]D_j = \mathbb{1}[D=j] and the mutually exclusive binary instruments Zj=1[Z=j]Z_j = \mathbb{1}[Z=j]. Note that D=∑j=1Jj×DjD = \sum_{j=1}^{J} j \times D_j and Z=∑j=1Jj×ZjZ = \sum_{j=1}^{J} j \times Z_j. This setting, in which treatment and instrument have the same number of values and use the same labels, is common in IV applications with multiple treatments [9]. Section 3.1 discusses how distinct treatment and instrument supports can be accommodated in our treatment cluster framework.

Treatments that are not mutually exclusive can always be made into mutually exclusive treatments by defining new categories for each combination of treatments.

Define YY as the observed outcome of interest. Suppose that the effect on YY of taking treatment jj compared to treatment kk is heterogeneous across individuals. The instrument Zj=1Z_j=1 if the policymaker intends to encourage take up of treatment jj, but in practice this initial encouragement may also induce individuals to take up other treatments l≠jl \ne j. We define D(z)D(z) as the potential treatment choice when ZZ is externally set to zz, with z=1,…,Jz = 1, \ldots, J. The dummy variable Dj(z)D_j(z) equals one if treatment jj is chosen if Z=zZ = z, and hence Dj=∑l=1JDj(l)×ZlD_j = \sum_{l=1}^{J} D_j(l) \times Z_l for each jj. Similarly, we define Y(d,z)Y(d,z) as the potential outcome when D=dD = d and Z=zZ = z, with d=1,…,Jd = 1, \ldots, J and z=1,…,Jz = 1, \ldots, J. We make the following standard IV assumptions:

Assumption 1 (IV assumptions).

  • a. (Independence) Y(d,z),D(z)⊥ZY(d,z), D(z) \perp Z for all d,zd,z.

  • b. (Exclusion) Y(d,z)=Y(d)Y(d,z) = Y(d) for all d,zd,z.

Analyzing treatment choice at the unclustered treatment level is not always possible. For instance, consider fields of study as the multiple unordered treatments. Obtaining administrative data on study enrollment at the field of study level may be infeasible, in particular due to privacy constraints with the emergence of smaller degrees. With many small degrees it is challenging to obtain accurate estimates for the pairwise treatment effects between the degrees. Moreover, a large number of treatment effect estimates may be less relevant if the policy is designed at a less granular level, such as the promotion of gender equality in STEM enrollment [35]. In such cases, practitioners often aggregate treatments into clusters and analyze the causal effects between these treatment clusters.

IV with clustered treatment data

This section analyses IV estimation with treatment clusters. First, it shows under which assumptions the IV estimand with two treatment clusters identifies a causal parameter, and discusses the interpretation of this parameter. Second, it shows that the results extend to the two-stage least squares (TSLS) estimand with an arbitrary number of clusters.

The IV estimand with two treatment clusters

Suppose we have two mutually exclusive clusters of treatments S1S_1 and S2S_2. Define D~1=∑n∈S1Dn\widetilde{D}_1 = \sum_{n\in S_1} D_n, which equals one if a treatment in cluster S1S_1 is chosen and zero otherwise. Similarly, define Z~1=∑n∈S1Zn\widetilde{Z}_1 = \sum_{n\in S_1} Z_n, which equals one if there is an initial encouragement to take up treatment from cluster S1S_1 and zero otherwise. We refer to DnD_n and ZnZ_n as the treatment and instrument at the unclustered treatment level, and to D~1\widetilde{D}_1 and Z~1\widetilde{Z}_1 as these objects at the treatment cluster level. Consider the IV estimand

β=ΔE[Y∣Z~1]ΔE[D~1∣Z~1],(1)\beta= \frac{\Delta\mathbb{E}[Y \mid\widetilde{Z}_1]}{\Delta\mathbb{E}[\widetilde{D}_1 \mid\widetilde{Z}_1]}, \tag*{(1)}

where ΔE[A∣Z~1]=E[A∣Z~1=1]−E[A∣Z~1=0]\Delta\mathbb{E}[A \mid\widetilde{Z}_1] = \mathbb{E}[A \mid\widetilde{Z}_1 = 1] - \mathbb{E}[A \mid\widetilde{Z}_1 = 0]. This estimand can be used to, for instance, identify the returns to STEM education in an RDD where YY equals salary, D~1=1\widetilde{D}_1 = 1 indicates STEM enrollment, and Z~1=1\widetilde{Z}_1 = 1 represents a STEM enrollment offer for students with a STEM application score near the admission cutoff. For the IV estimand to exist, we invoke the IV relevance assumption at the cluster level:

Assumption 2 (Relevance). ΔE[D~1∣Z~1]>0\Delta\mathbb{E}[\widetilde{D}_1 \mid\widetilde{Z}_1] > 0.

This imposes relevance only at the treatment cluster level. Hence, the instrument may have no effect on the probability of taking treatments at the unclustered level, as long as it has a nonzero effect on the probability of taking treatment from cluster S1S_1.

We assume that the estimand in (1) is considered when the effect of taking treatment from cluster S1S_1 compared to taking treatment from cluster S2S_2 is of interest. A key identification challenge is that individuals may respond in various ways to the instrument. To describe this heterogeneity in responses, we follow Heckman and Pinto [28] and define a response type as a vector of potential treatment choices for ZZ fixed at each value of its support: (D(1),D(2),…,D(J))(D(1), D(2), \ldots, D(J)). We refer to all response types who take treatment ll if Z=jZ = j and treatment mm if Z=kZ = k as (D(j)=l,D(k)=m)(D(j) = l, D(k) = m). Similarly, (D(j)∈S1,D(k)∈S2)(D(j) \in S_1, D(k) \in S_2) describes all types who take treatment from S1S_1 if Z=jZ = j and treatment from S2S_2 if Z=kZ = k.

Table 1 shows four different response types if we both consider the treatments and the instruments at the cluster level. These include all possible types, if we exclude individuals Notes: For j∈S1j \in S_1 and k∈S2k \in S_2, the rows are mutually exclusive and exhaustive among response types satisfying D(j)≠D(k)D(j) \ne D(k).

Response types with D(j)≠D(k)D(j) \ne D(k)Contribution Lemma 1Excluded by
(D(j)∈S1,D(k)∈S2)(D(j) \in S_1, D(k) \in S_2)Effects across S1S_1 and S2S_2
(D(j)∈S2,D(k)∈S1)(D(j) \in S_2, D(k) \in S_1)Negative effectsAssumption 3
(D(j)∈S1,D(k)∈S1)(D(j) \in S_1, D(k) \in S_1)B1B_1Assumption 3
(D(j)∈S2,D(k)∈S2)(D(j) \in S_2, D(k) \in S_2)B2B_2Assumption 4

Table 1. Response types with two treatment clusters

with D(j)=D(k)D(j) = D(k) if j∈S1j \in S_1 and k∈S2k \in S_2, who do not contribute to the instrument-induced treatment contrasts underlying the IV estimand. The following lemma shows that the identification of the effect of taking treatment from cluster S1S_1 compared to taking treatment from S2S_2 requires all response types to satisfy (D(j)∈S1,D(k)∈S2)(D(j) \in S_1, D(k) \in S_2) with j∈S1j \in S_1 and k∈S2k \in S_2. To prevent unwanted responses, additional assumptions are required.

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