Beyond Random Assignment: Credible Inference of Causal Effects in Dynamic Economies

46 Pages Posted: 15 Feb 2015 Last revised: 11 Nov 2015

See all articles by Chris Hennessy

Chris Hennessy

London Business School

Ilya A. Strebulaev

Stanford University - Graduate School of Business; National Bureau of Economic Research

Multiple version iconThere are 3 versions of this paper

Date Written: October 2015

Abstract

Random assignment is insufficient for measured treatment responses to recover causal effects (comparative statics) in dynamic economies. We characterize analytically bias probabilities and magnitudes. If the policy variable is binary there is attenuation bias. With more than two policy states, treatment responses can undershoot, overshoot, or have incorrect signs. Under permanent random assignment, treatment responses overshoot (have incorrect signs) for realized changes opposite in sign to (small relative to) expected changes. We derive necessary and sufficient conditions, beyond random assignment, for correct inference of causal effects: martingale policy variable. Infinitesimal transition rates are only sufficient absent fixed costs. Stochastic monotonicity is sufficient for correct sign inference. If these conditions are not met, we show how treatment responses can nevertheless be corrected and mapped to causal effects or extrapolated to forecast responses to future policy changes within or across policy generating processes.

Keywords: Natural experiments; Policy evaluations; Dynamic environments; Random treatment; Causal effects

Suggested Citation

Hennessy, Christopher and Strebulaev, Ilya A., Beyond Random Assignment: Credible Inference of Causal Effects in Dynamic Economies (October 2015). Stanford University Graduate School of Business Research Paper No. 15-19. Available at SSRN: https://ssrn.com/abstract=2564828 or http://dx.doi.org/10.2139/ssrn.2564828

Christopher Hennessy

London Business School ( email )

Sussex Place
Regent's Park
London, London NW1 4SA
United Kingdom

Ilya A. Strebulaev (Contact Author)

Stanford University - Graduate School of Business ( email )

655 Knight Way
Stanford, CA 94305-5015
United States

HOME PAGE: http://faculty-gsb.stanford.edu/strebulaev/

National Bureau of Economic Research ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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