Scandinavian Working Papers in Economics

Working Paper Series,
IFAU - Institute for Evaluation of Labour Market and Education Policy

No 2015:12: Direct and indirect treatment effects: causal chains and mediation analysis with instrumental variables

Markus Frölich () and Martin Huber ()
Additional contact information
Markus Frölich: University of Mannheim, Postal: L7, 3-5, , 68131 Mannheim, Germany
Martin Huber: University of St. Gallen, Postal: Varnbüelstrasse 14, 9000 St. Gallen, Switzerland

Abstract: This paper discusses the nonparametric identification of causal direct and indirect effects of a binary treatment based on instrumental variables. We identify the indirect effect, which operates through a mediator (i.e. intermediate variable) that is situated on the causal path between the treatment and the outcome, as well as the unmediated direct effect of the treatment using distinct instruments for the endogenous treatment and the endogenous mediator. We examine different settings to obtain nonparametric identi-fication of (natural) direct and indirect as well as controlled direct effects for continuous and discrete mediators and continuous and discrete instruments. We illustrate our approach in two applications: to disentangle the effects (i) of education on health, which may be mediated by income, and (ii) of the Job Corps training program, which may affect earnings indirectly via working longer hours and directly via higher wages per hour.

Keywords: Direct treatment effects; mediation analysis

JEL-codes: C13; C14

73 pages, June 4, 2015

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