Discussion paper

DP15175 Signaling, Random Assignment, and Causal Effect Estimation

Causal evidence from random assignment has been labeled "the most credible." We argue it
is generally incomplete in finance/economics, omitting central parts of the true empirical causal
chain. Random assignment, in eliminating self-selection, simultaneously precludes signaling via
treatment choice. However, outside experiments, agents enjoy discretion to signal, thereby caus-
ing changes in beliefs and outcomes. Therefore, if the goal is informing discretionary decisions,
rather than predicting outcomes after forced/mistaken actions, randomization is problematic.
As shown, signaling can amplify, attenuate, or reverse signs of causal e¤ects. Thus, traditional
methods of empirical finance, e.g. event studies, are often more credible/useful.


Chemla, G and C Hennessy (2020), ‘DP15175 Signaling, Random Assignment, and Causal Effect Estimation‘, CEPR Discussion Paper No. 15175. CEPR Press, Paris & London. https://cepr.org/publications/dp15175