Why is it the case that an instrumental variable is not found directly in the determining function?
A) If an instrument is exogenous, then it has no effect on the outcome beyond those already in the determining function.
B) If an instrument is relevant, then it has no effect on the outcome beyond those already in the determining function.
C) If an instrument is exogenous, then it has an effect on the outcome just not a statistically significant one.
D) If an instrument is relevant, then it has an effect on the outcome just not a statistically significant one.

Question

Quizplus · Accepted Answer

An instrumental variable is used to address endogeneity in a determining function, where the variable of interest may be affected by unobservable factors. An instrumental variable is not found directly in the determining function because it is chosen to be correlated with the endogenous variable but not directly related to the outcome variable. This allows the effect of the endogenous variable on the outcome variable to be estimated without bias.

Why Is It the Case That an Instrumental Variable Is