Part 1 - Getting Started
Brief Outline
1. The Role of Theory
2. Causation versus Correlation 3? Experimental Studies
a. Conducting an Experimental Study b. Pitfalls of Experimental Studies
4. Observational Studies
a. Conducting an Observational Study b. Pitfalls of Observational Studies
5? Quasi-Experimental Studies
a. Conducting a Quasi-Experimental Study b. Pitfalls of Quasi-Experimental Studies
6. Conclusions
Answers to End-of-Chapter Questions
1 ? A change in the marginal tax rate changes the individual's net wage. This generates both an income effect and a substitution effect. As long as leisure is a normal good, these effects work in opposite directions. Hence, one cannot tell a priori whether labor supply increases or decreases? If there were no political or legal impediments, an experimental study could be conducted in which a control group confronts the status quo, and an experimental group faces the new tax regime. Other things that affect work effort would impact both the control group and the experimental group, so any difference in work effort between the two groups could be attributed to the change in marginal tax rates.
2. This is a valid criticism of the study of New York Homelessness. It reflects the problem of causality? Two things may be correlated, but it can be difficult to determine which causes the other. The remedy would be to set up a study in which individuals are randomly assigned to groups. In an experimental study, the group offered job training, counseling services, and emergency money would not necessarily be more motivated than a group not signed up for those services, so if they do not become homeless, it could be attributed to the programs. 3. The workers who spend time on a computer probably have other skills and abilities that contribute to higher wages, so training children to use computers would not necessarily cause their earnings potential to improve? This study illustrates the difficulty of determining cause and effect based on correlations. The data do not reveal whether using a computer causes higher earnings, or whether other factors cause workers to use computers and to earn higher wages. 4. The text points out the pitfalls of social experiments: the problem of obtaining a random sample and the problems of extending results beyond the scope of the experiment. Participants in the study had found it to their advantage to be a part of the experiment, which may have resulted in a self^selected population unrepresentative of the wider group of health care consumers. In addition, the RAND Health Insurance Experiment was of limited duration, after which the participants would move to some other health plan. This
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design could induce certain behavior in the short-run that would not necessarily be present if the health insurance coverage were permanent rather than transitory. Further, physicians9 \practices55 are largely determined by the circumstances of the population as a whole, not the
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