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Friday, March 02, 2007

Microeconomics quiz of the week

From the Wall Street Journal's ProfessorJournal-dot-com:

The article is a wonderful popular press piece about the use of instrumental variables in the analysis of economic and non-economic analysis. The primary focus of the article is the question of whether economics should contribute to research in other sciences. "Academic economists are increasingly venturing beyond their traditional stomping ground, a wanderlust that has produced some powerful results but also has raised concerns about whether they're sometimes going too far.... Such debates are likely to grow as economists delve into issues in education, politics, history and even epidemiology. Prof. Waldman's use of precipitation illustrates one of the tools that has emboldened them: the instrumental variable, a statistical method that, by introducing some random or natural influence, helps economists sort out questions of cause and effect. Using the technique, they can create 'natural experiments' that seek to approximate the rigor of randomized trials -- the traditional gold standard of medical research. Instrumental variables have helped prominent researchers shed light on sensitive topics." The article nicely describes the importance of instrumental variables to establishing causality in statistical relationships. "Economists usually have neither the money nor the access to children needed to perform that kind of experiment. More broadly, randomized trials seldom lend themselves to studying economic questions, particularly the more traditional ones. It would be unfair to randomly subject some people to a higher tax rate just to see how it affects their spending. Instead, economists look for instruments -- natural forces or government policies that do the random selection for them. First developed in the 1920s, the technique helps them separate cause and effect. Establishing whether A causes B can be difficult, because often it could go either way. If television watching were shown to be unusually prevalent among autistic children, it could mean either that television makes them autistic or that something about being autistic makes them more interested in TV. The ideal instrument is a variable that is correlated with A but has no direct effect of its own on B. It should also have no connection to other factors that might cause B. If data in a study nonetheless show that the instrumental variable is linked to B, it suggests that A must be contributing to B."

1.) Why are economists investigating non-economic issues?

2.) What are instrumental variables? How are they used in establishing causality in statistical analyses?

3.) How did Professor Michael Waldstein, Cornell University, investigate the causal relationship between television watching and autism?

4.) Suppose there is a positive correlation between television watching and autism. How can researchers establish whether increased television watching causes an increase in rates of autism or whether increased autism rates cause an increase in television watching? In other words, is television watching a cause of autism or is it that autistic children are more likely to watch television? Discuss randomized trials and instrumental variables.

Reviewed By: James Dearden, Lehigh University

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