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5 February 2009

Deaton on use of randomized trials in development economics

A new NBER paper by Angus Deaton takes on the trendiness of randomized trials, instrumental variables and natural experiments in development economics. One of the main points: well-designed experiments are most useful when they help uncover general mechanisms (i.e. inform theory) and can support real-life policy-making outside their narrow context. A good if lengthy read.

Deaton, A (2009) Instruments of development: Randomization in the tropics, and the search for the elusive keys to economic development, NBER Working Paper 14690. http://papers.nber.org/papers/w14690

Harvard users click here.

There is currently much debate about the effectiveness of foreign aid and about what kind of projects can engender economic development. There is skepticism about the ability of econometric analysis to resolve these issues, or of development agencies to learn from their own experience. In response, there is movement in development economics towards the use of randomized controlled trials (RCTs) to accumulate credible knowledge of what works, without over-reliance on questionable theory or statistical methods. When RCTs are not possible, this movement advocates quasi-randomization through instrumental variable (IV) techniques or natural experiments. I argue that many of these applications are unlikely to recover quantities that are useful for policy or understanding: two key issues are the misunderstanding of exogeneity, and the handling of heterogeneity. I illustrate from the literature on aid and growth. Actual randomization faces similar problems as quasi-randomization, notwithstanding rhetoric to the contrary. I argue that experiments have no special ability to produce more credible knowledge than other methods, and that actual experiments are frequently subject to practical problems that undermine any claims to statistical or epistemic superiority. I illustrate using prominent experiments in development. As with IV methods, RCT-based evaluation of projects is unlikely to lead to scientific progress in the understanding of economic development. I welcome recent trends in development experimentation away from the evaluation of projects and towards the evaluation of theoretical mechanisms.

Posted by Sebastian Bauhoff at 8:12 AM