The Paradox of Policy-Relevant Natural Experiments

43 Pages Posted: 7 Jul 2016 Last revised: 11 Dec 2017

See all articles by Gilles Chemla

Gilles Chemla

Imperial College Business School; CNRS ; Centre for Economic Policy Research (CEPR)

Chris Hennessy

London Business School

Date Written: June 2016

Abstract

We examine robustness of evidence derived from ideal randomizations applied to atomistic subjects in dynamic settings. Paradoxically, once experimental evidence is viewed as sufficiently clean to use, it then becomes contaminated by ex post endogeneity: Measured responses depend upon priors and the objective function into which evidence is fed. Moreover, agents policy beliefs become endogenously correlated with their causal parameters, clouding inference. Finally, treatment-control differences are contaminated absent quadratic adjustment costs. Constructively, we illustrate how inference can be corrected accounting for feedback and highlight factors mitigating contamination.

Keywords: firms, government, investment, natural policy experiments, pollution, randomized controlled trials

Suggested Citation

Chemla, Gilles and Hennessy, Christopher, The Paradox of Policy-Relevant Natural Experiments (June 2016). CEPR Discussion Paper No. DP11361. Available at SSRN: https://ssrn.com/abstract=2804539

Gilles Chemla (Contact Author)

Imperial College Business School ( email )

South Kensington Campus
London SW7 2AZ, SW7 2AZ
United Kingdom
+44 207 594 9161 (Phone)
+44 207 594 9210 (Fax)

CNRS ( email )

Dauphine Recherches en Management
Place du Marechal de Lattre de Tassigny
Paris, 75016
France
331 44054970 (Phone)

Centre for Economic Policy Research (CEPR)

London
United Kingdom

Christopher Hennessy

London Business School ( email )

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

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