Empirical Methods

TL;DR: Empirical methods are used to answer counterfactual questions about the impact of policies and programs. They involve evaluating the difference between outcomes under different scenarios. However, the fundamental difficulties of program evaluation arise due to the impossibility of observing the same school with and without textbooks at the same time.

Abstract: The goal of this handout is to present the most common empirical methods used in applied economics. Excellent references for the program evaluation and natural experiment approach are and at a more detailed level than this handout and should be a high priority paper to read for students planning to write a thesis in empirical development, labor of public finance. 1 The evaluation problem Empirical methods in development economics, labor economics, and public finance, have been developed to try to answer counterfactual questions. What would have happened to this person's behavior if she had been subjected to an alternative policy T (e.g. would she work more if marginal taxes were lower, would she earn less if she had not gone to school, would she be more likely to be immunized if there had been an immunization center in village?). Here is an example that illustrates the fundamental difficulties of program evaluation: Let us call Y T i the average test scores of children in a given school i if the school has textbooks, and Y C i the test scores of children in the same school i if the school has no textbooks. We are interested in the difference Y T i − Y C i , which is the effect of having textbooks for school i. Problem: we will never have a school i both with and without books at the same time. What can we do? We will never know the effect of having textbooks on a school in particular but we may hope to learn the average effect that it will have on schools: E[Y T i − Y C i ].