Abstract

This study demonstrates the existence of a testable condition for the identification of the causal effect of a treatment on an outcome in observational data, which relies on two sets of variables, namely observed covariates to be controlled for and a suspected instrument. Under a causal structure commonly found in empirical applications, the testable conditional independence of the suspected instrument and the outcome given the treatment and the covariates has two implications. First, the instrument is valid, i.e.\ it does not directly affect the outcome (other than through the treatment) and is unconfounded conditional on the covariates. Second, the treatment is unconfounded conditional on the covariates such that the treatment effect is identified. We suggest tests of this conditional independence based on doubly robust estimators and investigate their finite sample performance in a simulation study. We also apply our testing approach to the evaluation of the impact of fertility on female labor supply when using the sibling sex ratio of the first two children as supposed instrument, which by and large points to a violation of our testable implication, at least for the moderate set of socio-economic covariates considered.