Nobel Prize 2019 for Experimental Approach in Economics

The 2019 Nobel Prize in Economics has just been announced, and the three winners are Abhijit Banerjee, Esther Duflo, and Michael Kremer. Congratulations!

According to the press release of the Nobel Prize, there are two reasons of the prize as follows:

“for their experimental approach to alleviating global poverty”. [1]

Many local reports focus their contributions on their poverty-alleviating studies, but I would say it is more leading and unprecedented in their experimental approach in studying development economics. There may be more than hundreds of researchers, if not thousands, studying on global poverty issues. Many of them have derived insightful theories and/or provided empirical evidence. It would be hard to say whose contributions on alleviating global poverty are more important than others. For example, it is well known that another Nobel Laureate Joseph Stiglitz is also an expert in global poverty issue. You may refer to the Youtube debating “Can the Free Market End Global Poverty?” by Joseph Stiglitz and William Easterly. [2]

However, the experimental approach in Economics is a big contribution, as most of the economic theories, especially macroeconomics, are well known to be very difficult to be tested by experiments. For example, in housing policy studies, it is almost impossible to carry out a randomized control experiment in a city to test whether rent control is effective or not, even though there has been a long debate on this issue and some economists argued that rent control would only result in black markets or rental proxies, such as “shoe-money”. Yet, all these articles are based on observations, rather than randomized control experiments.

There are at least two types of experimental approach in research. One is to carry out experiments in a laboratory, the other is field experiments. There have been some attempts of lab-experimental approach in testing economic theories. For example, the Prospect Theory in Behavioural Economics is commonly tested in a lab or classroom setting. [3] I have also conducted some classroom tests by asking students to play Monopoly board game to test the impacts of excessive money supply on housing prices.

But Abhijit Banerjee, Esther Duflo, and Michael Kremer’s experimental approach is not a lab-experiment, but a real-life field-experiment! They conducted randomized trials in real-life situations, it is very valuable because it is difficult, if not impossible, to convince any governments or NGOs to allow any real-life randomized control experiments of their policies or schemes. Bearing in mind that in order to have valid control in the experiments, a control group of the subject people would not be able to receive any benefits from the positive policies or to avoid any harm from the negative policies. Sometimes it may also have to have a Placebo Group without letting the subject samples know.

For example, Michael Kremer and his colleagues decided to move part of their research from their universities in the north-eastern US to rural western Kenya in order to test the following hypotheses:

Hypotheses: Would pupils’ results improve if they had access to more textbooks? Or would giving them free school meals be more effective?

“In the mid-1990s, They performed a number of field experiments in partnership with a local non-governmental organisation (NGO). … Kremer and his colleagues took a large number of schools that needed considerable support and randomly divided them into different groups. The schools in these groups all received extra resources, but in different forms and at different times. In one study, one group was given more textbooks, while another study examined free school meals.” [4]

Image for post
Image for post
Source: The Royal Swedish Academy of Sciences

Interestingly, the field experiments found that it is not resources that matter, but whether teaching is sufficiently adapted to the pupils’ needs. [4]

This example is exemplary, as it shows that theorization can be very wrong even if it is elegant in logic and mathematical derivations. Empirical evidence is indispensable. Yet, traditional empirical tests based on observations can also be very wrong because it does not control the missing variables bias or the confirmatory bias. It is nowadays well received that a randomized intervention with a good control study is a better approach to tell whether the theory is correct or not.

I myself have also tried to carry out field experiments in the past few years, by working in the Legislative Council and collaborate with NGOs in trying new ideas on community engagements. For example, the 4-zero scheme to build an environmentally friendly community, and monitor the budgets of the public construction projects, etc. However, so far all these field trials in Hong Kong are at best cases study only as they could not be conducted in a randomized approach with control groups.

Kremer (2014) [5] has explained the origin and evolution of the experimental approach in development economics, but very little on how they managed to convince government officials or NGO’s management to allow them to conduct randomized experiments on their clients. Hopefully, the three Laureates can teach us more on this.

References

[1] The Nobel Prize (2019) Press release: The Prize in Economic Sciences 2019, Oct 14. https://www.nobelprize.org/prizes/economic-sciences/2019/press-release

[2] Reason TV (2018) Can the Free Market End Global Poverty? by Joseph Stiglitz and William Easterly, Youtube, Sep 13. https://www.youtube.com/watch?v=6r1ykRsYPW0

[3] Barberis, N.C. (2013) Thirty Years of Prospect Theory in Economics: A Review and Assessment, Journal of Economic Perspectives 27(1), 173–196. http://dx.doi.org/10.1257/jep.27.1.173.

[4] The Royal Swedish Academy of Sciences (2019) Research to help the world’s poor, Popular Science Background, THE PRIZE IN ECONOMIC SCIENCES 2019. https://www.nobelprize.org/uploads/2019/10/popular-economicsciencesprize2019-2.pdf

[5] Michael Kremer (2014) The Origin and Evolution of Randomized Evaluations in Development, Youtube Jan 27. https://www.youtube.com/watch?v=YGL6hPgpmDE

Written by

ecyY is the Founder of Real Estate Development and Building Research & Information Centre REDBRIC

Get the Medium app

A button that says 'Download on the App Store', and if clicked it will lead you to the iOS App store
A button that says 'Get it on, Google Play', and if clicked it will lead you to the Google Play store