How to justify an instrumental variable? I am hoping for some tips on what I could do for a term paper in applied econometrics. We are running a 2sls where I want to use a firm's location as an IV. How can I go about justifying it is a valid instrument? More specifically, how would you suggest I can argue the exclusion restriction holds for my instrument. I am thinking of a verbal argument of about a page tops, since I have limited space left. Any suggestions would be greatly appreciated. Thank you. 

PS: My endogenous variable is a dummy for whether the business owner is a member of a political party, and my outcome variable is a leverage ra
To motivate a good IV in a paper, you need a good story. For example: schools build in Indonesia as an instrument for education outcomes, quarter of birth as an instrument for income as a result of compulsory education, in their respective papers.

The IV has to be correlated to the characteristic you're trying to fix and uncorrelated to any of the other observable characteristics. 

That way, the IV is only affecting the Y variable through the characteristic you're instrumenting. As far as statistically strong, you can look at examples from a few papers and see what kind of statistical scrutiny they used.