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DIME Event: Spurious Regressions and Panel IV Estimation: Revisiting the Causes of Conflict

April 2, 2019

MC 6-100

  • Several recent empirical studies use instrument variables (IV) estimation strategies in panel data to try to identify statistically the causes of violent conflict.

    We explain how the long-recognized spurious regressions problem can lead to both bias and mistaken inference in panel IV studies given cycles in the time series component of the panel. We illustrate the problem by revisiting two recent, prominent studies that rely for identification on instruments exhibiting opposing cycles over time. The use of shift-share or other interacted instruments does not resolve the bias. When outcome variables are cointegrated with endogenous variables through policy preferences or some other mechanism, the bias can be in the same direction as the reverse causation the IV is meant to resolve.

    We close by outlining seven practical diagnostic steps researchers can follow to reduce the prospect of spurious regressions confounding panel IV estimation. 

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    Economist, DIME

    Paul Christian is an Economist in the Development Impact Evaluation unit of the of the World Bank’s research department. His research on agriculture and food security programs focuses on targeting and management of irrigation projects. He has led impact evaluati... ons in India, Nepal, Mozambique, Liberia, and Ghana. Dr. Christian holds a PhD and MA in Economics from Brown University, and a BA in Economics from the University of Notre Dame. Prior to joining the impact evaluation unit he worked as a research associate in the Charles H. Dyson School of Applied Economics and Management at Cornell University where he helped lead Cornell’s involvement in the Structural Transformation of African Agriculture and Rural Spaces (STAARS) project.

  • DIME is a World Bank-wide program to generate knowledge on the effectiveness of development policies. Working across 18 thematic areas, DIME collaborates with 300 agencies in 72 countries to improve the effectiveness of policies and programs and strengthen country capacity for real-time evidence-based policy-making. More »