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CHAPTER 2

CHAPTER 2. Tools of Positive Analysis. The Role of Theory. Economic models virtue of simplicity judging a model limitations of models Empirical analysis. Causation vs. Correlation. Statistical analysis Correlation Control group Treatment group

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CHAPTER 2

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  1. CHAPTER 2 Tools of Positive Analysis

  2. The Role of Theory • Economic models • virtue of simplicity • judging a model • limitations of models • Empirical analysis

  3. Causation vs. Correlation • Statistical analysis • Correlation • Control group • Treatment group • Conditions required for government action X to cause societal effect Y • X must precede Y • X and Y must be correlated • Other explanations for any observed correlation must be eliminated

  4. Experimental Studies • Biased estimates • Counterfactual • Experimental (or randomized) study

  5. Conducting an Experimental Study • Random assignment to control and treatment groups

  6. Pitfalls of Experimental Studies • Ethical issues • Response bias • Impact of limited duration of experiment • Generalization of results to other populations, settings, and related treatments • Black box aspect of experiments

  7. Observational Studies • Observational study – empirical study relying on observed data not obtained from experimental study • Sources of observational data • Surveys • Administrative records • Governmental data • Econometrics • Regression analysis

  8. L = α0 + α1wn + α2X1 + … + αnXn + ε Dependent variable Independent variables Parameters Stochastic error term Regression analysis Regression line Standard error L wn Conducting an Observational Study Slopeis α1 Interceptis α0 α0

  9. Types of Data • Cross-sectional data • Time-series data • Panel data

  10. Pitfalls of Observational Studies • Data collected in non-experimental setting • Specification issues

  11. Quasi-Experimental Studies • Quasi-experimental study (= natural experiment) – observational study relying on circumstances outside researcher’s control to mimic random assignment

  12. Pitfalls of Quasi-Experimental Studies • Assignment to control and treatment groups may not be random • Not applicable to all research questions • Generalization of results to other settings and treatments

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