AGEC 608: Lecture 11

1. AGEC 608: Lecture 11 • Objective: Provide overview of how “demonstrations” are typically used in deriving benefits and costs of government programs • Readings: • Boardman, Chapter 11 • Homework #3: class average = 84 • Homework #4: Chapter 7, problem 3 Chapter 10, problems 1 + 2 Chapter 13, problem 3due: April 11

2. What is a demonstration project? An attempt to obtain estimates of the benefits and costs of a project or program, typically before executing the project on a large scale. Usually work best for services provided to people (health, education, training, welfare, etc.). Not good for programs with large physical investments

3. Why conduct demonstration projects? 1. Determine if project works before implementing large scale 2. Predict impacts over the life of a full program 3. Allow learning in order to adapt or modify program But… Effects from a pilot program may not translate to a full program and market-wide effects may be missed by small demonstration projects.

4. Alternative evaluation designs • Classical experimental design, with baseline • Classical experimental design, without baseline • Before and after comparison • Non-experimental comparison without baseline data • Non-experimental comparison with baseline data

5. 1. Classical experimental design,with baseline Procedure: random assignment of individuals to treatment and control groups. Measure relevant data before and after treatment. Advantages: high internal validity Disadvantages costly ethical concerns about denying treatment to some (e.g. medical treatment)

6. 2. Classical experimental design,without baseline Procedure: random assignment of individuals to treatment and control groups. Collect data after treatment but not before (no baseline). Advantages: reasonable internal validity, but can’t determine how similar the groups are to begin with Disadvantages ethical concerns about denying treatment to some (e.g. medical treatment)

7. 3. Before and after comparison Procedure: random assignment of individuals to treatment group. No control group. Advantages: easy and inexpensive; good if non-program factors are believed to be unimportant. Disadvantages low internal validity

8. 4. Non-experimental comparisonwithout baseline data Procedure: similar to classical experiment but without random assignment of individuals to treatment. Advantages: less expensive than experimental design. Disadvantages can’t control for differences between groups, leading to sample selection bias (systematic differences between groups)

9. 5. Non-experimental comparisonwith baseline data Procedure: non-random assignment of individuals to treatment group. Collection of baseline data on both groups. Advantages: Baseline data allow one to adjust for prior differences in treatment and control groups. Disadvantages Still potential selection bias on unobserved variables.

10. CBAs of demonstration projects:the case of education & training Starting in the 1960s a number of CBAs were conducted for programs designed to provide workforce education and training. Data organized into benefits and costs for: participants non-participants society See Table 11.2

11. Conceptual issues in conducting CBAs of E & T demos • The participant perspective (income vs surplus) • Increase in wage rate (Figure 11.1) • Increase in hours worked (Figure 11.2) • Participation mandate (Figure 11.3) • Shift from welfare to private sector job • 2. Improvements in self esteem • Other issues (self-esteem, job-related expenditures, government provided childcare) (Figure 11.4)

12. Conceptual issues in conducting CBAs of E & T demos • The non-participant perspective (income vs surplus) • Intangible benefits of work vs. welfare • Benefits from in-program output (Figure 11.5) • Cost from public sector labor displacement • Costs from private sector labor displacement

13. Choosing prediction parameters • Time horizon • Decay rate vs. growth rate • Shadow price of capital