Superb interview of one of the most happening development eco professor – Esther Duflo.
She defends experimental economics/random evaluations aggressively:
Region: You’ve been a pioneer of experimental research in developing countries. Your work has inspired many others and helped revitalize development economics generally. But as you’re well aware, the experimental approach has also been criticized by some economists, for a variety of reasons, including lack of generalizability, ethical considerations, compliance issues and other issues—points James Heckman made 20 years ago.2
What are the central advantages of the experimental approach over other methods—observational studies, for instance, or structural estimation techniques? Or is it complementary to those? And the follow-up question is, Which of the criticisms do you consider well founded, and how do you address them?
Duflo: There are a number of distinct advantages over other methods. One, of course, is the obvious one, which is that running an experiment gives a handle on causality, at least in the particular context in which you run your experiment. When you run an experiment, you modify the conditions in one group and not in another group. Assuming the experiment was well run, you know that whatever different outcomes or behavior you measure are due to the modification of conditions.
So getting a handle on causality is the first advantage, and it’s the one that is easiest to explain to policymakers. If you want to know whether your policy works, that is a very transparent way to do it. And you know it with much more certainty than you would have without an experiment, because usually in the real world when things differ, there are reasons for it, and that possibility prevents you from estimating the causal effects of the policy or intervention.
But there are other advantages, which are more subtle. One is that you can sometimes with experiments estimate things that you just could not estimate in any other way. It’s not that you can do it better with an experiment; it’s that there is no other way to get at it.
Region: For example?
Duflo: Suppose you are interested in a range of price elasticity. You might be able to experiment with prices that are just not observed in nature. For example, when people sell things in the market, they don’t sell things at the price of zero. [Laughter] You might need an experiment in order to test zero. In fact, that’s a point Heckman made a long time ago, saying that that’s what experiments should be used for.
Say you are interested in estimating people’s response to increasing or decreasing their wage. That response is a combination of an income effect and a substitution effect. In the real world, you can’t really distinguish the two, because whenever wages increase, the two things happen.
But in an experimental context, you can separate the two. You can give people a bunch of income that doesn’t correspond to a wage, which you wouldn’t be able to do in a real world setting, so you can estimate the income effects separately from the substitution effect. This was what the negative income tax experiment set out to do, and Heckman was actually quite in favor of this particular use of experiments (in the 1991 article you cite).
She points how experimental approach led to discovering giffen goods when most thought they are just in textbooks or don’t exist anymore.
A recent example of this is an experiment by Rob Jensen and Nolan Miller, where they look at the effect on consumption of changes in the price of rice.3 If you decrease the price of rice, will people consume more rice or less rice? In the real world, it’s very difficult to know that because whenever the price of rice decreases, that’s the result of a combination of supply and demand factors, and isolating variation in the price of rice as purely exogenous is essentially impossible.
So you need an experiment to know, and in fact they found something very interesting when they did this experiment in one place in China where rice is a very important part of the food basket for the poor. And they found that when the price decreased, people ate less rice, not more rice, which means rice is a Giffen good [a product that consumers demand more of as its price rises because the income effect dominates the substitution effect].
Region: I didn’t know they existed.
Duflo: Well, exactly. Whether an actual Giffen good exists has been a question since … since [pause]
Region: Giffen himself, I suppose.
Duflo: [Laughter] [Alfred] Marshall brought it up, but he attributed the observation to one Dr. Giffen. And I think this experiment is very fascinating, because you can’t investigate it any other way. I think you can’t dispute the fact that rice, in this particular place in China, is a Giffen good.
She links women’s role in economic development as kind of remedy to market failures:
Region: At the Fed’s Jackson Hole symposium in late August, you suggested that reducing a variety of market failures could better ensure that the well-being of the poor improves as nations grow economically—that there would not be a growth/equity trade-off.5
You’ve also written that while development and women’s empowerment are reciprocally intertwined, neither ensures the other.6 In other words, that growth doesn’t guarantee gender equity, and empowerment won’t improve all aspects of life.
I read both pieces and wondered whether the market failure argument that you apply to income equality and growth is also relevant to gender equality. That is, can policies to reduce market failures better ensure women’s empowerment as nations develop?
Duflo: To a point, yes, there are cases where we see that, I think. For example, very few women are elected as policymakers; it could just be that people don’t like to be led by a woman. So then there’s no market failure. As women, we may not like it, but that’s the market equilibrium.
But it could be that it’s because people think that women are not going to be good. Or even not that they think that they won’t be good, but maybe they are just worried because they have never seen a woman lead, so their priors—that is, their prior beliefs—are very diffused. It seems to them that it is a very risky proposition to elect a woman, because they don’t know whether women are good in general, or not so good in general, so there is much more variance in their estimate of how good a woman will be, compared to a man. So they go for a man always just because they have gone for men always, and it’s the safe thing to do.
What is the common thread of her research?
Early on in my career, I guess, that’s a question which I wasn’t asking myself, and I wasn’t, in the sense, particularly interested in that. There are so many questions that are important in development that we know little about. So if I can get an opportunity to answer these questions, I should go for it. I guess that’s why there’s such a range of things I’ve studied.
In that range, there was one common thread, which is methodological: If I’ve made causal statements, they are accurate; these are true natural experiments or true randomized experiments. So that’s always been there.
But in terms of the topics, I guess I’ve looked at the common core of the type of questions that we as a development community think are important: education, infrastructure, et cetera. And on those questions, to just do what I could do.
I didn’t feel that more focus than that was particularly needed because, you know, it was such an open field. It was an excellent field when I entered it. I started at MIT in 1995. It was an ideal time to start working on economic development because the early 1990s had seen a lot of really fundamental theoretical work, particularly by Abhijit Banerjee, Andy Newman, Debraj Ray, Tim Besley and other applied theorists and building on Joseph Stiglitz. So, it’s a field that had first been reborn through applied theory. When I started working in this field, there was a range of questions that were all fitting together in a theoretical framework, but empirically, the questions were quite open.
Not very many people were working in empirical research then. I mean to say, of course, that the field has a long tradition of both empirical and theoretical work, but it was just not a very thick field. There’s a tradition of very, very good people. But with all of the theoretical work laid out in the early 1990s, it left many empirical questions wide open.
Hmmm…She stresses on emprical stuff all along.