Instrumental variables can help address endogeneity issues in regression analysis from "summary" of Introduction to Econometrics by Christopher Dougherty
Instrumental variables are a powerful tool that can be used to tackle the problem of endogeneity in regression analysis. Endogeneity arises when an independent variable is correlated with the error term in a regression model, leading to biased and inconsistent estimates of the coefficients. This can happen when there are omitted variables, measurement error, or simultaneity issues present in the data. By finding a variable that is correlated with the endogenous variable but uncorrelated with the error term, instrumental variables provide a way to overcome endogeneity. Essentially, instrumental variables act as a proxy for the endogenous variable, allowing us to estimate the causal effect of the variable of interest on the dependent variabl...
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