The validity of instrumental variable (IV) designs is typically tested using two types of falsification tests. We characterize these tests as conditional independence tests between negative control variables—proxies for unobserved variables posing a threat to the identification—and the IV or the outcome. We describe the conditions variables must satisfy in order to serve as negative controls. We show these falsification tests examine not only independence and the exclusion restriction but also functional form assumptions. Our analysis reveals conventional applications of these tests may flag problems even in valid IV designs. We offer implementation guidance to address these issues. (JEL C12, C18, C26, C52)
Danieli et al. (Tue,) studied this question.