CHAPTER 2

Tools of Positive Analysis

McGraw-Hill/Irwin

Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.

The Role of Theory

Economic models

virtue of simplicity judging a model

limitations of models

Empirical analysis

2-2

Causation vs. Correlation

Statistical analysis

Correlation Control group Treatment group

Conditions required for government action X to cause societal effect Y

X must precede Y X and Y must be correlated Other explanations for any observed correlation must be eliminated
2-3

Experimental Studies

Biased estimates
Counterfactual Experimental (or randomized) study

2-4

Conducting an Experimental Study

Random assignment to control and treatment groups

2-5

Pitfalls of Experimental Studies

Ethical issues
Technical problems Response bias

Impact of limited duration of experiment

Generalization of results to other populations, settings, and related treatments Black box aspect of experiments
2-6

Observational Studies

Observational study empirical study relying on observed data not obtained from experimental study
Sources of observational data

Surveys Administrative records Governmental data Regression analysis

Econometrics

2-7

Conducting an Observational Study

L = 0 + 1wn + 2X1 + + nXn +

Dependent variable Independent variables Parameters Stochastic error term Regression line Standard error

Regression analysis

Intercept is 0

Slope is 1 0 wn
2-8

Types of Data

Cross-sectional data
Time-series data Panel data

2-9

Pitfalls of Observational Studies

Data collected in non-experimental setting

Specification issues

2-10

Quasi-Experimental Studies

Quasi-experimental study (= natural experiment) observational study relying on circumstances outside researchers control to mimic random assignment

2-11

Conducting a Quasi-Experimental Study

Difference-in-difference quasi-experiments
Instrumental Variables quasi-experiments Regression-Discontinuity Quasi-Experiments

2-12

Pitfalls of Quasi-Experimental Studies

Assignment to control and treatment groups may not be random

Not applicable to all research questions

Generalization of results to other settings and treatments

2-13