Discussion Paper Details

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Title: Subject Rational Expectations Will Contaminate Randomized Controlled Medical Trials

Author(s): Gilles Chemla and Christopher Hennessy

Publication Date: June 2016

Keyword(s): Bias, Rational Expectations and RCTs

Programme Area(s): Development Economics, Financial Economics, Industrial Organization and Public Economics

Abstract: We develop a rational expectations model of placebo effects. If subjects in seemingly-ideal single-stage RCTs form rational beliefs about breakthroughs based upon personal physiological responses, mental effects differ across medications received, treatment versus control. Consequently, the average cross-arm health difference becomes a biased estimator of the mean non-placebo physiological effect. Constructively, we show: bias can be altered through choice of control; high-efficacy controls mitigate upward bias; and unbalanced panels may be preferred since bias approaches zero as treatment probability approaches zero. Consistent with experimental evidence, our theory implies outcomes within-arm and cross-arm differences can be non-monotone in treatment probability.

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Bibliographic Reference

Chemla, G and Hennessy, C. 2016. 'Subject Rational Expectations Will Contaminate Randomized Controlled Medical Trials'. London, Centre for Economic Policy Research.