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Instrumental variables: clues to law department productivity

Economists believe there are causal links between the institutions of a country and its prosperity. Institutions – organizations, formal laws and unwritten rules that govern a country – function better in rich countries than in impoverished ones. But it might be that wealth breeds stronger institutions, a reverse causality. To explore the relationship, economists seek third factors that are linked to stronger institutions but are unconnected to economic success, according to the Economist, Nov. 4, 2006 at 88. One example is winds and weather, which explains when many islands were colonized, and the length of colonization correlates now with prosperity. Meteorology was an instrumental variable.

Or do campaign contributions influence a political candidate’s vote share? The problem is that both variables may be influenced by perceptions about the threat posed by a challenger. That factor is an instrumental variable.

What’s an example of an instrumental variable in a law department? Many managers believe that quality lawyers lead to high productivity. They also probably believe that a productive law department lures and keeps quality lawyers. So, which comes first? In which direction does causality flow? An instrumental variable might be the company’s reputation. A company well thought of may entice superior lawyers to join and also boost productivity.

When we think we know that doing this will cause that, we should pause and look around for instrumental variables.

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