DP11361 The Paradox of Policy-Relevant Natural Experiments

Author(s): Gilles Chemla, Christopher Hennessy
Publication Date: June 2016
Date Revised: December 2017
Keyword(s): firms, government, investment, natural policy experiments, pollution, randomized controlled trials
JEL(s):
Programme Areas: Public Economics, Financial Economics, Industrial Organization, Development Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=11361

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.