A Slippery Slope: Topographic Variation as an Instrument
Exploiting exogenous natural variation to study the impact of hard-to-randomize policies based on instrumental variables (IVs) is a widespread research design in economics. The key identification assumption underlying this design is the exclusion restriction, requiring the IV to affect the outcome variable only through the instrumented treatment variable. We review the literature using topography as an IV to show that systematic violations of this assumption are likely because of topography's ubiquity in socioeconomic relationships. Furthermore, as topography often lacks first-stage strength, even subtle violations of the exclusion restriction undermine any causal inference. Rather than vindicating IVs unless the identification assumptions are directly contradicted, we advocate a stress-testing perspective on topographic IVs that treats the exclusion restriction with systematic skepticism. We illustrate this perspective using a seminal example of a topographic IV, Dinkelman (2011).
United States Association for Energy Economics (USAEE)
JEL-Klassifikation: C26, C36, C52, O13, O18
DOI: 10.2139/ssrn.7093978