22.11.2011 - 22.08.2017 / Health Econometrics
Increasing the credibility of the twin instrument
Twin births are an important instrumental variable for the endogenous fertility decision. However, in many economic settings, twins are not exogenous either as dizygotic twinning is known to be correlated with maternal characteristics and fertility treatments. Following the literature in medicine and epidemiology, we assume that monozygotic twins are a random event occurring from the spontaneous division of a single fertilized egg. We use this exogenous variation to construct a new instrumental variable, which corrects for the selection bias although monozygotic twinning is usually unobserved in survey or administrative datasets. We use longitudinal administrative data from Sweden and US census data and show that the usual twin instrument is not only related to observed but also to unobserved determinants of economic outcomes, while our new instrumental variable is not. We demonstrate the relevance of our new instrument in two labor market applications and find that the classical twin instrument underestimates the true negative effect of fertility on labor force participation and earnings. This finding is in line with the observation that high earners are more likely to delay childbearing and hence have a higher risk to get dizygotic twins.