Discussion Paper Details

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Title: The Paradox of Policy-Relevant Natural Experiments

Author(s): Gilles Chemla and Christopher Hennessy

Publication Date: June 2016

Keyword(s): firms, government, investment, natural policy experiments, pollution and randomized controlled trials

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

Abstract: We examine robustness of evidence derived from ideal randomizations applied to atomistic subjects in dynamic settings. Paradoxically, once experimental evidence is viewed as sufficiently clean to use, it then becomes contaminated by ex post endogeneity: Measured responses depend upon priors and the objective function into which evidence is fed. Moreover, agents policy beliefs become endogenously correlated with their causal parameters, clouding inference. Finally, treatment-control differences are contaminated absent quadratic adjustment costs. Constructively, we illustrate how inference can be corrected accounting for feedback and highlight factors mitigating contamination.

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Bibliographic Reference

Chemla, G and Hennessy, C. 2016. 'The Paradox of Policy-Relevant Natural Experiments'. London, Centre for Economic Policy Research.