Can Policy Changes Be Treated as Natural Experiments? Evidence from State Excise Taxes
Jeffrey D. Kubik
Syracuse University - Department of Economics
John R. Moran
Penn State University
July 1, 2002
Syracuse University Center for Policy Research Working Paper No. 39
An important issue in public policy analysis is the potential endogeneity of the policies under study. If policy changes constitute responses on the part of political decision-makers to changes in a variable of interest, then standard analyses that treat policy changes as natural experiments may yield biased estimates of the impact of the policy (Besley and Case 2000). We examine the extent to which such political endogeneity biases conventional fixed effects estimates of behavioral parameters by identifying the elasticities of demand for cigarettes and beer using the timing of state legislative elections as an instrument for changes in state excise taxes. In both cases, we find sizable differences between these estimated demand elasticities and the fixed effect estimates cited in Evans, Ringel, and Stech (1999). We conclude that the use of fixed effects estimators in environments where policy interventions are endogenously determined may lead to large biases in the estimated effects of the policies.
Number of Pages in PDF File: 57
JEL Classification: C9, D12working papers series
Date posted: April 15, 2011
© 2013 Social Science Electronic Publishing, Inc. All Rights Reserved.
This page was processed by apollo5 in 0.313 seconds