Can Policy Changes Be Treated as Natural Experiments? Evidence from State Excise Taxes

Syracuse University Center for Policy Research Working Paper No. 39

57 Pages Posted: 15 Apr 2011

See all articles by Jeffrey D. Kubik

Jeffrey D. Kubik

Syracuse University - Department of Economics

John R. Moran

Penn State University

Date Written: July 1, 2002

Abstract

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.

JEL Classification: C9, D12

Suggested Citation

Kubik, Jeffrey D. and Moran, John R., Can Policy Changes Be Treated as Natural Experiments? Evidence from State Excise Taxes (July 1, 2002). Syracuse University Center for Policy Research Working Paper No. 39. Available at SSRN: https://ssrn.com/abstract=1808888 or http://dx.doi.org/10.2139/ssrn.1808888

Jeffrey D. Kubik (Contact Author)

Syracuse University - Department of Economics ( email )

426 Eggers Hall
Syracuse, NY 13244-1020
United States
315-443-9063 (Phone)
315-443-1081 (Fax)

John R. Moran

Penn State University ( email )

116 Henderson Bldg.
Penn State University
University Park, PA 16802
United States

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