Industry Average as Instrumental Variable

What is this post about?

What is an instrumental variable?

2 Figures. One from Kennedy and one from book

Interpreting OLS regression with Ballentine Venn diagramInterpreting OLS regression with Ballentine Venn diagram

Figure 1: Interpreting OLS regression with Ballentine Venn diagram

See (fig-OLS?) compared to (fig-IV?).

Interpreting OLS regression with Ballentine Venn diagramInterpreting OLS regression with Ballentine Venn diagram

Figure 2: Interpreting OLS regression with Ballentine Venn diagram

How are instrumental variables used in Operations Management?

Why is industry average a bad instrument?

So why now is industry average, in my humble opinion, a bad instrument? First, there are good reasons why authors choose it and why peer reviewers do not object. Mainly, in most cases the relevance condition holds and an argument can be made that the exclusion restriction holds.

The theoretical argument for the relevance condition is based on institutional theory. Firms adopt certain practices through mimetic if their peers (i.e. other firms in the industry) adopt

What should we do instead?