Joshua D. Angrist - Mastering Metrics: The Path from Cause to Effect

Mastering Metrics

Mastering Metrics

The Path from Cause to Effect

Joshua D. Angrist
and
Jrn-Steffen Pischke

PRINCETON UNIVERSITY PRESS PRINCETON AND OXFORD

Copyright 2015 by Princeton University Press

Published by Princeton University Press, 41 William Street, Princeton, New Jersey 08540
In the United Kingdom: Princeton University Press, 6 Oxford Street, Woodstock, Oxfordshire OX20 1TW

press.princeton.edu

Jacket and illustration design by Wanda Espana

Book illustrations by Garrett Scafani

All Rights Reserved

Library of Congress Cataloging-in-Publication Data

Angrist, Joshua David.

Mastering metrics : the path from cause to effect / Joshua D. Angrist, Jrn-Steffen Pischke.

pages cm

Includes index.

Summary: Applied econometrics, known to aficionados as metrics, is the original data science. Metrics encompasses the statistical methods economists use to untangle cause and effect in human affairs. Through accessible discussion and with a dose of kung fu-themed humor, Mastering Metrics presents the essential tools of econometric research and demonstrates why econometrics is exciting and useful. The five most valuable econometric methods, or what the authors call the Furious Fiverandom assignment, regression, instrumental variables, regression discontinuity designs, and differences in differences-are illustrated through wellcrafted real-world examples (vetted for awesomeness by Kung Fu Pandas Jade Palace). Does health insurance make you healthier? Randomized experiments provide answers. Are expensive private colleges and selective public high schools better than more pedestrian institutions? Regression analysis and a regression discontinuity design reveal the surprising truth. When private banks teeter, and depositors take their money and run, should central banks step in to save them? Differences-in-differences analysis of a Depression-era banking crisis offers a response. Could arresting O.J. Simpson have saved his ex-wifes life? Instrumental variables methods instruct law enforcement authorities in how best to respond to domestic abuse. Wielding econometric tools with skill and confidence, Mastering Metrics uses data and statistics to illuminate the path from cause to effect. Shows why econometrics is important Explains econometric research through humorous and accessible discussion Outlines empirical methods central to modern econometric practice Works through interesting and relevant real-world examplesProvided by publisher.

ISBN 978-0-691-15283-7 (hardback : alk. paper)
ISBN 978-0-691-15284-4 (paperback : alk. paper)

1. Econometrics. I. Pischke, Jrn-Steffen. II. Title.

HB139.A53984 2014

330.015195dc23 2014024449

British Library Cataloging-in-Publication Data is available

This book has been composed in Sabon with Helvetica Neue Condensed family display using ZzTEX by Princeton Editorial Associates Inc., Scottsdale, Arizona

Printed on acid-free paper.

Printed in the United States of America

1 3 5 7 9 10 8 6 4 2

CONTENTS

FIGURES

TABLES

INTRODUCTION

B LIND M ASTER P O: Close your eyes. What do you hear?

Y OUNG K WAI C HANG C AINE: I hear the water, I hear the birds.

M ASTER P O: Do you hear your own heartbeat?

K WAI C HANG C AINE: No.

M ASTER P O: Do you hear the grasshopper that is at your feet?

K WAI C HANG C AINE: Old man, how is it that you hear these things?

M ASTER P O: Young man, how is it that you do not?

Kung Fu, Pilot

E conomists reputation for dismality is a bad rap. Economics is as exciting as any science can be: the world is our lab, and the many diverse people in it are our subjects.

The excitement in our work comes from the opportunity to learn about cause and effect in human affairs. The big questions of the day are our questions: Will loose monetary policy spark economic growth or just fan the fires of inflation? Iowa farmers and the Federal Reserve chair want to know. Will mandatory health insurance really make Americans healthier? Such policy kindling lights the fires of talk radio. We approach these questions coolly, however, armed not with passion but with data.

Economists use of data to answer cause-and-effect questions constitutes the field of applied econometrics, known to students and masters alike as metrics. The tools of the metrics trade are disciplined data analysis, paired with the machinery of statistical inference. There is a mystical aspect to our work as well: were after truth, but truth is not revealed in full, and the messages the data transmit require interpretation. In this spirit, we draw inspiration from the journey of Kwai Chang Caine, hero of the classic Kung Fu TV series. Caine, a mixed-race Shaolin monk, wanders in search of his U.S.-born half-brother in the nineteenth century American West. As he searches, Caine questions all he sees in human affairs, uncovering hidden relationships and deeper meanings. Like Caines journey, the Way of Metrics is illuminated by questions.

Other Things Equal

In a disturbing development you may have heard of, the proportion of American college students completing their degrees in a timely fashion has taken a sharp turn south. Politicians and policy analysts blame falling college graduation rates on a pernicious combination of tuition hikes and the large student loans many students use to finance their studies. Perhaps increased student borrowing derails some who would otherwise stay on track. The fact that the students most likely to drop out of school often shoulder large student loans would seem to substantiate this hypothesis.

Youd rather pay for school with inherited riches than borrowed money if you can. As well discuss in detail, however, education probably boosts earnings enough to make loan repayment bearable for most graduates. How then should we interpret the negative correlation between debt burden and college graduation rates? Does indebtedness cause debtors to drop out? The first question to ask in this context is who borrows the most. Students who borrow heavily typically come from middle and lower income families, since richer families have more savings. For many reasons, students from lower income families are less likely to complete a degree than those from higher income families, regardless of whether theyve borrowed heavily. We should therefore be skeptical of claims that high debt burdens cause lower college completion rates when these claims are based solely on comparisons of completion rates between those with more or less debt. By virtue of the correlation between family background and college debt, the contrast in graduation rates between those with and without student loans is not an other things equal comparison.