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|
|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.