Instrumental Variables and Causal Mechanisms

Unpacking the Effect of Trade on Workers and Voters

  • Christian Dippel UCLA Anderson School of Management
  • Robert Gold
  • Stephan Heblich
  • Rodrigo Pinto UCLA Department of Economics

Abstract

It is often the case that an endogenous treatment variable causally affects an intermediate
variable that in turn causally affects a final outcome. Using an Instrumental
Variable (IV) identifies the causal effect of the endogenous treatment on both the intermediate
and the final outcome variable, but not the extent to which the intermediate
variable affects the final outcome. We present a new testable framework in which
a single IV suffices to also estimate the causal effect of the intermediate variable on
the final outcome. We use this framework to investigate to what extent German voters
responded to the labor market turmoil caused by increasing trade with low-wage
manufacturing countries. We first establish that import competition increased voters’
support for only extreme (right) parties. We then decompose this populist ‘total
effect’ into a ‘mediated effect’ running through labor market adjustments and a ‘direct
effect’ of trade exposure on voting behavior. We find the total consists of a large
populist effect driven by labor markets and a relatively smaller but moderating direct
effect. Our approach provides a template that may be useful in a broad range of
empirical applications studying causal mechanisms in observational data.

Published
2017-07-31
How to Cite
DIPPEL, Christian et al. Instrumental Variables and Causal Mechanisms. UCLA CCPR Population Working Papers, [S.l.], july 2017. Available at: <http://papers.ccpr.ucla.edu/index.php/pwp/article/view/632>. Date accessed: 23 aug. 2017.