A Likelihood-Based Analysis for Relaxing the Exclusion Restriction in Randomized Experiments with Imperfect Compliance

This paper examines the problem of relaxing the exclusion restriction for the evaluation of causal effects in randomized experiments with imperfect compliance. Exclusion restriction is a relevant assumption for identifying causal effects by the nonparametric instrumental variables technique, in which the template of a randomized experiment with imperfect compliance represents a natural parametric extension. However, the full relaxation of the exclusion restriction yields likelihood functions characterized by the presence of mixtures of distributions. This complicates a likelihood-based analysis because it implies partially identified models and more than one maximum likelihood point. We consider the model identifiability when the outcome distributions of various compliance states are in the same parametric class. A two-step estimation procedure based on detecting the root closest to the method of moments estimate of the parameter vector is proposed and analyzed in detail under normally distributed outcomes. An economic example with real data on return to schooling concludes the paper.