Sensitivity Analyses of the Deterrence Hypothesis: Let's Keep the Econ in Econometrics

Abstract

Leamer and McManus applied Extreme Bound Analysis (EBA) in an empirical study of the deterrent effects of capital punishment and other penalties. Their analysis has questioned the validity of the deterrence hypothesis. The thrust of our paper is twofold: first, by applying EBA to well-known econometric models of demand, production, and human-capital investment, our analysis exposes and illustrates the inherent flaws of EBA as a method of deriving valid inferences about model specification. Second, since the analysis shows Leamer and McManus's inferences about deterrence to be based on a flawed methodology, we offer an alternative, theorybased sensitivity analysis of estimated deterrent effects using similar data. Our analysis supports the deterrence hypothesis. More generally, it emphasizes the indispensable role of theory in guiding sensitivity analyses of model specification.