How Is Econometrics Changing? (Josh Angrist, Guido Imbens, Isaiah Andrews)

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- [Narrator] Welcome
to Nobel Conversations.

In this episode,

Josh Angrist and Guido Imbens
sit down with Isaiah Andrews

to discuss how the field
of econometrics is evolving.

- [Isaiah] So Guido and Josh,
you're both pioneers

in developing tools for
empirical research in economics.

And so I'd like to explore

sort of where you feel like
the field is heading,

sort of economics, econometrics,
the whole thing.

To start, I'd be interested to hear

about whether you feel like
sort of the way in which

the local average treatment
effects framework sort of took hold

has any lessons for how
new empirical methods in economics

develop and spread
or how they should.

- [Josh] That's a good question.

You go first.

(laughter)

Yeah, so I think
the important thing

is to come up
with good convincing cases

where the questions are clear

and where kind of
the methods apply in general.

So one thing I --

Kind of looking back
at the subsequent literature,

so I really like the regression
discontinuity literature

[where there were] clearly a bunch
of really convincing examples

and that allowed people to kind of

think more clearly, look harder
at the methodological questions.

Kind of do clear applications

that then allow you
to kind of think about,

"Wow, do this type of assumption
seem reasonable here?

What kind of things do we not like
in the early papers?

How can we improve things?"

So having clear applications
motivating these literatures,

I think it's very helpful.

- [Josh] I'm glad you mentioned

the regression
discontinuity, Guido.

I think there's a lot of
complementarity between IV and RD,

Instrumental Variables and
Regression Discontinuity.

And a lot of
the econometric applications

of regression discontinuity

are what used to be called
"fuzzy" RD,

where, you know, it's not discrete
or deterministic at the cutoff,

but just the change
in rates or intensity.

And the late framework helps us
understand those applications

and gives us a clear interpretation

for say, something like,
in my paper with Victor Lavy,

where we use Maimonides'
rule, the class size cutoffs.

What are you getting there?

Of course, you can
answer that question

with a linear
constant effects model,

but it turns out
we're not limited to that,

and RD is still very powerful
and illuminating,

even when, you know,

the correlation between the cutoff
and the variable of interest,

in this case class size,
is partial,

maybe even not that strong.

So there was definitely a kind of,
a parallel development.

It's also interesting,

you know, nobody talked about
regression discontinuity designs

when we were in graduate school,

it was something that other social
scientists were interested in,

and that kind of grew up
alongside the LATE framework

and we've both done work on
both applications and methods there

and it's been very exciting
to see that kind of develop

and become so important.

It's part of a general evolution,
I think, towards, you know,

credible identification strategies,
causal effects...

less, you know, making econometrics

more about causal questions
than about models.

In terms of the future,

I think one thing that LATE
has helped facilitate

is a move towards more creative,
randomized trials, where,

you know, there's
something of interest,

it's not possible
or straightforward

to simply turn it off or on,

but you can encourage it
or discourage it.

So you subsidize schooling
with financial aid, for example.

So now we have a whole
framework for interpreting that,

and it kind of opens
the doors to randomized trials

of things that maybe would,
you know,

not have seem possible before.

We've used that a lot in the work
we do on schools in our --

in the Blueprint Lab at MIT,

we're exploiting random assignment
and in very creative ways, I think.

- [Isaiah] Related to that, do you
see sort of particular factors

that make for useful research
in econometrics?

You've alluded to
it having a clear connection

to problems
that are actually coming up

and empirical practice
is often a good idea.

- [Josh] Isn't it always
a good idea?

I often find myself sitting in an
econometrics theory seminar,

say the Harvard MIT seminar,

and I'm thinking, "What problem
is this guy solving?

Who has this problem?"

And, you know,

sometimes there's an
embarrassing silence if I ask

or there might be
a fairly contrived scenario.

I want to see
where the tool is useful.

There are some
purely foundational tools,

I do take the point, you know,
there are people who are

working on conceptual
foundations of, you know,

it's more -- becomes more like
mathematical statistics.

I mean, I remember
an early example of that that I,

you know, I struggled to understand

was the idea
of stochastic equicontinuity,

which one of my thesis advisors,
Whitney Newey,

was using to great effect

and I was trying to understand that
and there isn't really --

It's really foundational, it's not
an application that's driving that,

at least not immediately.

But most things are not like that
and so there should be a problem.

And I think it's on the seller
of that sort of thing,

you know, because there's
opportunity cost,

the time and attention,
and effort to understand things

to, you know,
it's on the seller to say,

"Hey, I'm solving this problem

and here's a set of results
that show that it's useful,

and here's some insight
that I get."

- [Isaiah] As you said, Josh, great,
sort of there's been a move

in the direction of thinking
more about causality

in economics and empirical
work in economics,

any consequences of sort of the --

the spread of that view
that surprised you

or anything that you view
as downsides

of sort of the way
that empirical economics has gone?

- [Josh] Sometimes I see,
somebody does IV

and they get a result
which seems implausibly large.

That's the usual case.

So it might be, you know,
an extraordinarily large

causal effect of some
relatively minor intervention,

which was randomized
or for which you could make a case

that there's a good design.

And then when I see that,
and, you know, I think

it's very hard for me to believe

that this relatively
minor intervention

has such a large effect.

The author will sometimes resort

to the local average
treatment effects theorem

and say, "Well, these compliers,

you know, they're
special in some way."

And, you know,
they just benefit extraordinarily

from this intervention.

And I'm reluctant
to take that at face value.

I think, you know,
often when effects are too big,

it's because the exclusion
restriction is failing,

so you don't really have the right
endogenous variable

to scale that result.

And so I'm not too happy to see

you know, just sort of
a generic heterogeneity

argument being used
to excuse something

that I think might be
a deeper problem.

- [Guido] I think it played
somewhat of an unfortunate role

when the discussions kind of
between reduced form

and structural approaches,

where I feel
that wasn't quite right.

The instrumental
variables assumptions

are at the core - structural
assumptions about behavior -

they were coming from economic --

thinking about the economic
behavior of agents,

and somehow it got
pushed in a direction

that I think wasn't
really very helpful.

The way I think, initially the --

we wrote things up, it was
describing what was happening,

there were a set of methods
people were using,

we clarified what
those methods were doing

and in a way that I think
contain a fair amount of insight,

but it somehow
it got pushed into a corner

that I don't think
was necessarily very helpful.

- [Isaiah] I mean,
just the language

of reduced form versus structural

I find kind of funny
in the sense that,

right, the local average treatment
effect model, right,

the potential outcomes model is
a nonparametric structural model,

if you want to think about it,
as you sort of suggested, Guido.

So there's something a little funny

about putting these
two things in oposition when --

- [Guido] Yes.
- [Josh] Well, that language,

of course, comes from
the [inaudible] equations framework

that we inherited.

It has the advantage

that people seem to know
what you mean when you use it,

but might be that people
are hearing different,

different people
are hearing different things.

- [Guido] Yeah. I think [inaudible]
has sort of become --

used in a little bit
of the pejorative way, yeah?

- [Josh] Sometimes.
- [Guido] [The word].

Which is not really quite what
it was originally intended for.

- [Isaiah] I guess something else
that strikes me in thinking about

the effects of the local average
treatment effect framework

is that often folks will appeal to

a local average treatment effects
intuition for settings well beyond

ones where any sort
of formal result

has actually been established.

And I'm curious, given all the work
that you guys did to, you know,

establish late results
in different settings,

I'm curious, any thoughts on that?

- [Guido] I think there's
going to be a lot of cases

where the intuition
does get you some distance,

but it's going to be
somewhat limited

and establishing
formal results there

may be a little tricky

and then maybe only work
in special circumstances,

and you end up
with a lot of formality

that may not quite
capture the intuition.

Sometimes I'm somewhat
uneasy with them

and they are not necessarily
the papers I would want to write,

but I do think something --

intuition often does capture
part of the problem.

I think, in some sense we were
kind of very fortunate there

in the way that the late paper
got handled at the journal,

is that, actually, the editor,
made it much shorter

and that then allowed us to kind of
focus on very clear, crisp results.

Where if you -- you know, this
somewhat unfortunate tendency

in the econometrics literature

of having the papers
get longer and longer.

- [Josh] Well, you should
be able to fix that, man.

- [Guido] I'm trying to fix that.

But I think this is an example
where it's sort of very clear

that having it be short
is actually --

- [Josh] You should impose
that no paper

can be longer than the late paper.

- [Guido] That, wow.

That may be great.

- [Josh] At least no theory,
no theory paper.

- [Guido] Yeah,
and I think, I think...

I'm trying very hard to get
the papers to be shorter.

And I think there's a lot of value

today because it's often
the second part of the paper

that doesn't actually get you much
further in understanding things

and it does make things
much harder to read

and, you know,
it sort of goes back

to how I think econometrics
should be done,

you should focus on --

It should be reasonably
close to empirical problems.

They should be very clear problems.

But then often the theory
doesn't need to be quite so long.

- [Josh] Yeah.

- [Guido] I think things have gone
a little off track.

- [Isaiah] A new relatively
recent change

has been a seeming big
increase in demand

for people with sort of
econometrics,

causal effect estimation skills
in the tech sector.

I'm interested,
do either of you have thoughts

on sort of how
that's going to interact

with the development
of empirical methods,

or empirical research
in economics going forward?

- [Josh] Well, there's
sort of a meta point,

which is, there's this new
kind of employer,

the Amazons and the Uber,
and, you know, TripAdvisor world,

and I think that's great.

And I like to tell my students
about that, you know, especially --

at MIT we have a lot of
computer science majors.

That's our biggest major.

And I try to seduce some of those
folks into economics by saying,

you know, you can go
work for these,

you know, companies that people
are very keen to work for

because the work seems exciting,

you know, that the skills
that you get in econometrics

are as good or better

than any competing
discipline has to offer.

So you should at least

take some econ, take some
econometrics, and some econ.

I did a fun project with Uber

on labor supply of Uber drivers

and was very, very exciting
to be part of that.

Plus I got to drive
for Uber for a while

and I thought that was fun too.

I did not make enough
that I was tempted to

give up my MIT job,
but I enjoyed the experience.

I see a potential challenge to our
model of graduate education here,

which is, if we're training people
to go work at Amazon, you know,

it's not clear why, you know,
we should be paying

graduate stipends for that.

Why should the taxpayer effectively
be subsidizing that.

Our graduate education
in the US Is generously subsidized,

even in private universities,

it's ultimately -- there's a lot of
public money there,

and I think the
traditional rationale for that is,

you know, we were training
educators and scholars,

and there's a great externality
from the work that we do,

it's either
the research externality,

or a teaching externality.

But, you know,
if many of our students

are going to work
in the private sector,

that's fine, but maybe their
employers should pay for that.

- [Guido] But maybe
is not so different

from people working
for consulting firms.

It's not clear to me

that the number of jobs
in academics has changed.

- [Josh] I feel like this
is a growing sector,

whereas consulting --
you're right to raise that,

it might be the same
for consulting,

but this, you know,

I'm placing more and more
students in these businesses.

So, it's on my mind
in a way that I've sort of,

you know, not been attentive
to consulting jobs,

you know, consulting
was always important,

and I think also
there's some movement

from consulting back into research,
it's a little more fluid.

A lot of the work in both domains

I have to say,
it's not really different

but, you know, people who
are working in the tech sector

are doing things that are
potentially of scientific interest,

but mostly it's hidden.

Then you really I have to say,

you know, why is the government
paying for this?

Yeah, although, yeah,
I mean to Guidos point,

I guess there's
a data question here

of it has the sort of
total [no-neck] sort of say

for-profit sector employment
of econ Ph.D. program graduates

increased or has it just been
a substitution from finance

and consulting towards tech.

- [Josh] I may be reacting
to something

that's not really happening.

- [Guido] I've actually
done some work

with some of these tech companies.

I don't disagree with Josh's point
that we need to think

a little bit about
the funding model,

who is it in the end paying
for the graduate education.

But from a scientific perspective,

not only do these places
have great data

and nowadays they tend to be
very careful with that

for privacy reasons,

but they also have great questions.

I find it very inspiring
kind of to listen

to the people there and kind of see
what kind of questions they have,

and often they're questions

that also come up outside
of these companies.

I have a couple of papers
with Raj Chetty and Susan Athey,

where we look at ways
of combining experimental data

and observational data,
and kind of their --

Raj Chetty was interested
in what is the effect

of early childhood programs
on outcomes later in life,

not just kind on test scores,
but on earnings and stuff,

and we kind of developed methods

that would help you shed
light on that, onto some --

in some settings
and the same problems came up

kind of in this
tech company settings.

And so from my perspective,

it's the same kind of --

I was talking to people
doing empirical work,

I tried to kind of look at these
specific problems

and then try to come up
with more general problems,

we formulated the problems
at a higher level,

so that I can think about solutions
that work in a range of settings.

And so from that perspective,

the interactions
with the tech companies

are just very valuable
and very useful.

We do have students now
doing internships there

and then coming back
and writing more interesting thesis

as a result of their
experiences there.

- [Narrator] If you'd like to watch
more Nobel Conversations,

click here,

or if you'd like to learn
more about econometrics,

check out Josh's
"Mastering Econometrics" series.

If you'd like to learn more
about Guido, Josh and Isaiah

check out the links
in the description.

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