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

CHAPTER 2

Tools of Positive Tools of Positive AnalysisAnalysis

2-2

The Role of Theory

Economic models virtue of simplicity judging a model limitations of models

Empirical analysis

2-3

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

2-4

Experimental Studies

Biased estimates Counterfactual Experimental (or randomized) study

2-5

Conducting an Experimental Study

Random assignment to control and treatment groups

2-6

Pitfalls of Experimental Studies

Ethical issues Response bias Impact of limited duration of experiment Generalization of results to other populations,

settings, and related treatments Black box aspect of experiments

2-7

Observational Studies

Observational study – empirical study relying on observed data not obtained from experimental study

Sources of observational data Surveys Administrative records Governmental data

Econometrics Regression analysis

2-8

Conducting an Observational Study L = α0 + α1wn + α2X1 + … + αnXn + ε

Dependent variable Independent variables Parameters Stochastic error term

Regression analysis Regression line Standard error

wn

L

α0

Interceptis α0

Slopeis α1

2-9

Types of Data

Cross-sectional data Time-series data Panel data

2-10

Pitfalls of Observational Studies

Data collected in non-experimental setting Specification issues

2-11

Quasi-Experimental Studies

Quasi-experimental study (= natural experiment) – observational study relying on circumstances outside researcher’s control to mimic random assignment

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