Instrumental Variable Approach Research Articles

Housing prices, costs, and policy: The housing supply equation in Ireland since 1970

AbstractThis article examines the responsiveness of new housing supply to prices and costs, using the case of Ireland at quarterly frequency from the 1970s, as well as a county‐level panel from the 1990s. Across four error‐correction specifications, and supported by an instrumental variables approach, we find the estimated elasticity of new housing supply to prices of +0.9 in the baseline, while that of costs is larger in magnitude (−1.9). We present evidence that responsiveness to prices rose after the 1980s, then fell in the 2000s, before rising again and also that elasticities vary at the county level.

Exports and Income Inequality in Mexico

What is the effect of exports on local income inequality in developing countries? To respond to this question, we combine data on exports with a panel of welfare indicators for 2000 Mexican municipalities, and implement an instrumental variable approach to address endogeneity concerns. Our results show that a 10 per cent increase in the exports per worker reduces local income inequality, measured by the Gini coefficient, by 0.17 points (using a 0 to 100 scale). This is driven by income growth among households at the bottom of the income distribution. We also find that although exports do raise the total amount of labour incomes at the municipal level, average labour incomes do not change. This occurs because municipalities with growing exports also experience an increase in employment and working-age population driven by inflows of returning migrants and lower emigration outflows. Remittances also decline in response to rising exports.

A Factor‐Augmented New Keynesian Phillips Curve for the European Union Countries

AbstractIn this paper, a factor‐augmented version of the New Keynesian Phillips curve (NKPC) is assessed using a data set comprised of a large panel of European Union (EU) member countries. The factor‐augmentation is natural given that country‐level inflation rates are highly co‐moving. The presence of unattended common factors is important because it raises the issue of omitted variables bias, as the real marginal cost, which is a regressor of the NKPC, is likely to load on the same factors as inflation. One possibility here is to employ the regular instrumental variables approach. However, if the external instruments load on the same factors as the error term of the NKPC, the instruments would be invalid and the results would therefore likely be misleading. Motivated by this last observation, the present paper proposes a new estimator of the NKPC that allows for very general forms of factor dependencies and endogeneity. Our results provide evidence in support of the NKPC, but only after the presence of common factors has been appropriately accounted for.

The impacts of exporting to China: assessing the productivity gains of developing countries using an instrumental variable approach

ABSTRACT Developing countries have taken substantial measures to liberalize protected domestic markets to facilitate international trade. However, market liberalization often depends on policies of export expansion and innovations, raising the question: Is export expansion sufficient for productivity gains of developing countries? How does export expansion mediate the relationship between innovations and productivity gains? Are further policy interventions necessary? Hence, this study examines the impacts of developing countries’ exports to China on productivity gains from 1992-2022. Further, it investigates how innovations mediate the relationship between export expansion and productivity gains. The 2SLS method is applied for estimation, which addresses the endogeneity by using export expansion to China from other developing countries. The findings reveal that exports positively impact productivity driven by China’s rise. Innovations and learning by exporting significantly mediate the association between key variables. It highlights how developing countries benefit from China’s growth, contributing insights to trade and economic growth literature.

Natural resource rents and public spending on education in Africa: Does women's political empowerment matter?

The increase in the number of women in political office is one of the most significant social trends of recent decades. Although still underrepresented, women's participation in decision-making bodies is increasing. This paper analyzes the moderating effect of women's political empowerment on the relationship between natural resource rents and public spending on education in a sample of 47 African countries over the period 2003–2020. This study employs several recent methods to effectively address the endogeneity issue, including the Generalized Method of Moments in System (GMM-S) and the Two-stage Instrumental Variables (2SIV) approach. Overall, the results show that natural resource rents reduce public spending on education, but their interaction with the index of women's political empowerment in composite and disaggregated form increases public spending on education in Africa. These results are tested at four levels of robustness, including the inclusion of additional control variables, the exclusion of outliers, and the use of alternative dependent and independent variables. We suggest improving the representation of women in African political decision-making. This could include quotas for women in decision-making bodies, mentoring programs for women leaders, and financial incentives for political parties that promote women's participation. Steps must also be taken to address structural barriers that prevent women from fully participating in political life, such as discrimination and violence against women.

The effects of local economic development on female obesity (overweight) in sub‐Saharan Africa

AbstractObesity (overweight) is a widespread concern not only in high‐income nations but also in low‐income countries across sub‐Saharan Africa (SSA). Although many studies attribute this trend to economic development triggering a shift in nutrition patterns within SSA, they tend overlook a critical factor: the level at which these determinants are measured. Assessing them nationally while drawing comparisons with individual‐level obesity data introduces a statistical challenge known as the ecological fallacy. To address this, we utilize local‐level night light data as a proxy for local economic development. Analyzing demographic and health surveys from 44 SSA countries spanning the period 1992–2019, we find that local development is associated with a 0.002% increase in the body mass index of women. In addition, we find that night light intensity is associated with 0.2%–0.3% increases in probabilities of a woman being overweight and obese. Our results remain robust when we employ an instrumental variable approach by using a control function based on peer effect. In terms of policy implication, our research highlights that local development may entail potential health costs, emphasizing the need for African governments to invest in healthcare and also build physical infrastructure that can promote active lifestyles.

Action-Based Fiscal Consolidations and Economic Growth

This paper tests the hypothesis that action-based fiscal consolidations have a negative effect on GDP growth. Using the IMF’s dataset on action-based fiscal consolidations, instrumental variables’ regressions show that action-based fiscal consolidations have a significant positive effect on GDP growth. The instrumental variables’ regressions also show that action-based fiscal consolidations significantly increase investment and productivity. The findings presented in this paper thus strongly reject the hypothesis that action-based fiscal consolidations reduce growth. The paper argues that least squares estimates presented in previous literature suffer from negative reverse causality bias: GDP growth has a significant positive effect on both the likelihood and the magnitude of action-based fiscal consolidations. To uncover causal effects of action-based fiscal consolidations, researchers need to use an instrumental variables approach.

Subnational institutions, firm capabilities and eco-innovation

Abstract We examine the role institutional pressures, at the subnational level, play in the generation of eco-innovations and explicitly consider how they interact with firms’ heterogeneous capabilities and ownership characteristics. Theoretically, we combine elements from institutional theory with the resource-based view of the firm to develop our hypotheses. Empirically, we use a novel dataset over the period 2003–2013 compiled from several sources: (I) environmental regulations (city-level) from the China Environmental Statistical Yearbooks and City Statistical Yearbooks; (II) green patents (firm-level) from the China National Intellectual Property Administration; and (III) ownership (firm-level) from the National Bureau of Statistics. Our econometric analysis employs an instrumental variable (IV) approach that controls for endogeneity and a negative binomial multilevel methodology for robustness. The results show that institutional pressures associated with environmental regulations, implemented at city level, lead to more green patents produced by firms in these jurisdictions. Crucially, the effectiveness of environmental regulation is enhanced when firms invest more in their internal technological capabilities. Finally, we find that a firm’s affiliation with a business group enhances the positive effects of regulations in terms of the production of eco-innovations.

The Mist of corporate innovation

This study investigates the impact of air pollution on corporate innovation. Using the satellite generated Particulate Matter 2.5 concentration data in 390 cities in China over the period of 2000–2015, we find that severe air pollution (haze pollution) in a region may deteriorate the innovative performance of companies in the same region. Our results are robust to different air pollution and innovation measures. We employ both difference in differences and instrumental variable approaches to alleviate potential endogeneity concerns. In addition, we identify two possible mechanisms, reduced funds availability and loss of innovative talents, to explain the negative impact of air pollution on innovation.

The peer effects of corporate social responsibility in China: A pre-registered report

In recent years, businesses worldwide have shown a growing interest in adopting corporate social responsibility (CSR) practices. The driver of corporate CSR engagement has attracted widespread attention. This study seeks to examine how firms react to the CSR practices of their peers in China. The ordinary least square would be used to validate our hypothesis and the instrumental variable approach would be utilized to alleviate endogeneity threats. In addition, we propose two channels, named as market competition hypothesis and institutional pressure hypothesis to account for this peer effect. We plan to provide some empirical evidence to support both channels.

Anti-corruption campaign and economic growth in Chinese cities: The dichotomous mechanism of network-based political competition

I study how economic growth in Chinese cities responds to the recent anti-corruption campaign, focusing on a novel mechanism of network-based political competition, whereby the removal of investigated officials creates job vacancies and triggers promotion competition within the social network of the investigated officials for the vacancies. Such a network-based competition hinges on the premise that (1) some positions are persistently occupied by certain networks, and (2) high-ranked officials help low-ranked ones to achieve promotion within the network, two facts that are well supported by the evidence. Using a difference-in-differences and an instrumental variable approach, I find that cities’ GDP growth rate registers a 2.5-percentage-point increase following the investigation of the city leader’s connected officials. City leaders create a healthier business environment, attract investments, and increase government spending, while some long-term issues, including innovation, education, and environmental protection, are compromised, indicating the dichotomous nature of political competition.

Does the risk aversion of accountants matter? Female rank-and-file accounting employees and internal control quality

Using novel data on corporate accounting employees, we find that the risk aversion of rank-and-file accounting employees, proxied by the proportion of female accountants, is negatively associated with the likelihood of internal control weaknesses. The results are incremental to controlling for other accounting employee characteristics, such as experience and quality, which are also associated with fewer internal control weaknesses. In contrast, female non-accounting employees explain operating risk and not internal control risk. We mitigate endogeneity concerns by using an entropy balanced sample and an instrumental variable approach that exploits variation in the external supply of female accountants. Our study is among the first to provide large-sample archival evidence that characteristics of accounting employees matter to financial reporting and how these effects differ from non-accounting employees.

The long-run effects of monetary policy: The role of R&D investment in economic growth

This study examines the long-term economic effects of monetary policy, focusing on its impact on research and development (R&D) investment and firm productivity. Using data from Compustat, we analyze productivity’s response to monetary policy shocks, with an emphasis on the role of firm size, age, and leverage as indicators of credit constraints. We use high-frequency financial market data to identify monetary policy shocks through a local projections–instrumental variables (LP-IV) approach. Our findings reveal that smaller, younger, and less leveraged firms are more adversely affected by contractionary monetary policies, suggesting a significant impact on their R&D investments and subsequent productivity, particularly in the manufacturing sector. The findings also highlight that tight monetary policy has a persistent negative impact on firm productivity via reduced R&D investment, underscoring the need for policies like R&D subsidies to support long-term economic growth.

Trade Liberalisation and Manufacturing Employment in Developing Countries

The manufacturing sector has played an important role in the structural transformation process in the developing world by providing jobs and income opportunities. Using data from 131 developing countries from 1991 to 2020, we estimate the impact of trade liberalisation on manufacturing employment using panel fixed-effects and instrumental variable regression approaches. We find that trade liberalisation – on average – has harmed manufacturing employment in developing countries. There are considerable differences at the regional level; the impact has been most substantial in sub-Saharan African and Latin American countries. At least in these regions, trade liberalisation has contributed to deindustrialisation. Policies that improve labour productivity in manufacturing will increase the competitiveness of manufacturing firms in these countries in the face of growing trade globalisation.

RMB internationalization and exchange rate exposure of Chinese listed firms

This paper investigates the impact of Renminbi (RMB) internationalization on the foreign exchange rate risk exposure of Chinese listed firms. We find that RMB internationalization significantly reduces firms’ exposure to exchange rate fluctuations, particularly for non-US dollar currencies. However, it also increases exchange rate exposure to the US dollar. The findings remain robust even when controlling for other macroeconomic factors, utilizing an instrumental variable approach based on government reports and US dollar performance, and conducting multiple robustness tests. We also find that companies with heterogeneous products, low market power, and high levels of international competition benefit the most from RMB internationalization. Despite the US dollar’s continued centrality in the global monetary system, RMB internationalization offers a relief measure to Chinese firms in terms of exchange rate exposure.

The impact of rural living environment improvement programs on the subjective well-being of rural residents in China

Increasing people’s subjective well-being (SWB) remains a critical challenge for all countries. However, few studies have been dedicated to examining the influence of environmental governance programs on SWB, especially in developing and non-democratic societies. This paper aims to fill this void by taking the Rural Living Environment Improvement (RLEI) program in China—the largest rural living environment governance program in history, as an example to understand the role of environmental governance programs in SWB in the world’s biggest developing and non-democratic country. Based on 3747 individual samples from the China Labor-force Dynamics Survey database, we found that RLEI can significantly improve rural residents’ SWB. This effect remains significant after using the propensity score matching method and the instrumental variable approach to address potential selection bias and endogenous problems. The indirect analysis shows that RLEI can increase rural residents’ SWB mainly through improving their income, consumption expenditure, and health. Compared with rural sewage and livestock manure RLEI programs, rural waste RLEI program has a greater enhanced impact on rural residents’ SWB. The monetary value of RLEI based on the life satisfaction approach shows that the resulting improvement in rural residents’ SWB created by RLEI is almost equivalent to the effect of household income. While the monetary value of rural sewage, livestock manure, and rural waste RLEI program is equivalent to 1.2, 3.67, and 1.1 times the effect of household income. Heterogeneity analysis indicates that RLEI has a greater positive impact on SWB for junior and old-aged, low-educated, Midwestern and Northeastern, and working rural residents.

Spillovers of PE investments

AbstractWe investigate a potential primary effect of leveraged buyouts (LBOs) by private equity (PE) on peers in the same industry using data on US public‐to‐private LBO transactions between 1985 and 2016. We use a network‐based instrumental variable approach to account for potential endogeneity concerns. Our findings indicate that the LBOs by PEs matter for peer firms' performance and corporate strategy relative to nonpeer firms. Our study supports a learning factor hypothesis, but we find no evidence to support the conjecture that peers lose due to the increased competitiveness of the LBO target.

Environmental regulations and firms’ integration in global markets: using a new environmental performance index

AbstractThis paper investigates how the environmental performance of firms impacts their participation in global value chains (GVC). The analysis is based on a dataset of 15,922 firms located in 32 European, Central Asian, Middle Eastern, and North African countries, with information on firm-level environmental practices provided by the recent Green Economy module of the World Bank Enterprise Surveys. We propose the Firm Environmental Performance Index (FEPI), a new index measuring firms’ adoption of environmental actions. The index is used in a two-part instrumental variable approach to estimate the impact of FEPI on both the probability and the intensity of GVC participation, while addressing reverse causality concerns. The results indicate that a one-standard deviation increase in the FEPI increases the probability of participation by 6.4 percentage points, a result consistently observed in all regions and sectors. The effects on the intensity of participation are mostly non-significant. However, a negative effect is observed in exceptional cases, namely for firms that are importers only, have low-technology practices, and are located in less developed regions. The results are robust to alternative definitions of GVC participation, inclusion of alternative instruments, and to partial violations of the exclusion restriction. All in all, they suggest that complying with environmental regulations could lead to higher integration in global markets, albeit with adverse effects in some particular cases.

The impact of Fintech on corporate carbon emissions: Towards green and sustainable development

AbstractFintech, as the fusion of finance and technology, has not only transformed the traditional financial industry and contributed to reshaping the real economy. But also, it holds the potential to offer a feasible solution for achieving green and sustainable development. This paper investigates the impact of Fintech on corporate carbon emissions (CCEs) by using data from the National Tax Survey Database (NTSD). The results suggest that Fintech development leads to a reduction in CCEs. Our findings remain robust even after using the instrumental variable approach to alleviate endogeneity problems. The mechanism analysis reveals that Fintech reduces CCEs via alleviating financing constraints, improving energy efficiency, and promoting green innovation. Heterogeneity analysis demonstrates that Fintech dramatically decreases CCEs from coal energy consumption, while increasing CCEs from consuming power and gas energy. Additionally, carbon emissions from state‐owned and foreign companies experience a more pronounced reduction through Fintech compared to those from private firms. Furthermore, firms in eastern and middle regions are more vulnerable to Fintech development. Moreover, enterprises in non‐high‐tech industries and high‐polluting industries exhibit noteworthy performance in reducing carbon emissions through Fintech adoption. This research offers policymakers a path to effectively govern CCEs and achieve their carbon reduction targets.

Digital finance: a developing country perspective with special focus on gender and regional disparity

PurposeEven if digital financial services have a positive impact on financial inclusion, it creates a digital as well as gender divide within and across countries, creating regional disparity even within developing nations. Though pandemic has initiated digitalization of various services, there has been scanty research on whether digital transfer of income can improve digital financial inclusion in post-pandemic era, especially in developing countries. The purpose of the current study is to explain the regional disparity within developing countries from three regions East Asia Pacific, South Asia and Sub-Saharan Africa, using latest World Findex data, 2021.Design/methodology/approachThe author takes an instrumental variable approach to run bivariate probit model to find the factors that motivate the users to make digital payments.FindingsThe study observes that electronic transfer of wages, government transfers and remittances can motivate individuals to make use of digital mode of transactions and mobile. The practice of formal saving and borrowings are the prerequisites. However, this mechanism holds good for East Asia Pacific and not for South Asia and Sub-Saharan Africa, which are poor in information and communication technology infrastructure. Women are lagging behind men, but digital transfer of wages motivate them to make digital transaction.Practical implicationsDigitalization of all government services and provision of affordable mobile network and internet services are necessary for regions like South Asia and Sub-Saharan Africa. In East Asia Pacific region, data protection, data governance and better regulatory framework are required. Higher female labor force participation with digital transfer of wages and empowerment with smartphones are key to reducing the Gender gap.Originality/valueThe current study corrects for the possible endogeneity issue, which the extant literature has not paid attention to, and provides region-specific and gender-specific policy recommendations for an improved digital inclusion.