The Path from Cause to Effect

blind master PO: Close your eyes. What do you hear? young kwai chang caine: I hear the water, I hear the birds. master PO: Do you hear your own heartbeat?


master PO: Do you hear the grasshopper that is at your feet? kwai chang caine: Old man, how is it that you hear these things?

master PO: Young man, how is it that you do not?

Kung Fu, Pilot

Economists’ reputation for dismality is a bad rap. Economics is as exciting as any science can be: the world is our lab, and the many diverse people in it are our subjects.

The excitement in our work comes from the opportunity to learn about cause and effect in human affairs...

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Birthdays and Funerals

katy: Is this really what you’re gonna do for the rest of your life? boon: What do you mean?

katy: I mean hanging around with a bunch of animals getting drunk every weekend.

boon: No! After I graduate, I’m gonna get drunk every night.

Animal House, 1978 … of course

Your twenty-first birthday is an important milestone. American over-2 Is can drink legally, “at last,” some would say. Of course, those under age drink as well. As we learn from the exploits of Boon and his fraternity brothers, not all underage drinking is in moderation. In an effort to address the social and public health problems associated with underage drinking, a group of American college presidents have lobbied states to return the minimum legal drinking age (MLDA) to the Vietnamera threshold of 18...

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Make Me a Match, Run Me a Regression

Regression is the tool that masters pick up first, if only to provide a benchmark for more elaborate empirical strategies. Although regression is a many-splendored thing, we think of it as an automated matchmaker. Specifically, regression estimates are weighted averages of multiple matched comparisons of the sort constructed for the groups in our stylized matching matrix (the appendix to this chapter discusses a closely related connection between regression and mathematical expectation).


The key ingredients in the regression recipe are

■ the dependent variable, in this case, student z’s earnings later in life, also called the outcome variable (denoted by Ff);

■ the treatment variable, in this case, a dummy variable that indicates students who attended a private college or univers...

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Appendix: Standard Errors for Regression DD

Regression DD is a special case of estimation with panel data. A state-year panel consists of repeated observations on states over time. The repetitive structure of such data sets raises special statistical problems. Economic data of this sort typically exhibit a property called serial correlation (that’s serial as in “murder,” not “breakfast”). Serially correlated data are persistent, meaning the values of variables for nearby periods are likely to be similar.

We expect serial correlation in time series data like annual unemployment rates. When a state’s unemployment rate is higher than average in one year, it’s likely to be higher than average in the next...

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Instrumental Variables

kwai chang caine: From a single action, you draw an entire universe.

Kung Fu, Season 1, Episode 1

Our Path

Statistical control through regression may fail to produce convincing estimates of causal

effects. Luckily, other paths lead to other things equal. Just as in randomized trials, the forces of nature, including human nature, sometimes manipulate treatment in a manner that obviates the need for controls. Such forces are rarely the only source of variation in treatment, but this is an obstacle easily surmounted. The instrumental variables (IV) method harnesses partial or incomplete random assignment, whether naturally occuring or generated by researchers. We illustrate this important idea three ways...

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Table 1.1 Health and demographic characteristics of insured and uninsured couples in the


Data source. The 2009 NHIS data are from the Integrated Health Interview Series (IHIS) and are available at www. ihis. us/ihis/.

Sample. The sample used to construct this table consists of husbands and wives aged 26- 59, with at least one spouse working.

Variable definitions. Insurance status is determined by the IHIS variable UNINSURED. The health index is on a five-point scale, where 1 = poor, 2 = fair, 3 = good, 4 = very good, 5 = excellent; this comes from the variable HEALTH. Education is constructed from the variable EDUC and measures completed years of schooling. High school graduates and GED holders are assigned 12 years of schooling...

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