The Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel 2021, commonly known as the “Nobel Prize in Economics”, has just been awarded to David Card, Joshua Angrist and Guido Imbens, three researchers who have contributed to the renewal of labor economics - and economics more widely - by using natural experiments. According to Professor Camille Terrier and Rafael Lalive from HEC Lausanne (UNIL), the research carried out by these three exceptional winners has had a profound impact on their field of study and more generally, on social sciences research.
Until the 1990s, labor economists worked with nationally representative data sets that provide a snapshot of the world as it is, and tried to infer from these data, e.g. what an additional educational degree would bring in terms of earnings. Evidence was produced by running large scale and complicated econometric models, which essentially tried to induce causation from correlation.
All of this changed in 1990, when Professor David Card studied the effects of the "Mariel Boatlift”, with thousands of Cubans settling in Miami -- an experiment that arises in the natural world. Comparing Miami to other cities in the United States which had not experienced a large influx of immigrants, David Card showed that Miami was able to offer jobs to these immigrants without jeopardizing jobs for resident workers.
This "natural experiments" approach to doing research has gained immense traction in other fields of economics, management and other social sciences. But interpreting the results, e.g. when increases in compulsory schooling increase schooling on average, proved a challenge because students might react in very different ways to these laws -- imperfect compliance. Professors Joshua Angrist and Guido Imbens showed that natural experiments provide information on the effects of compulsory schooling laws for those students who have actually stayed in school longer because of the law.
There are close connections between the three Nobel laureates and HEC Lausanne. All three Nobel laureates visited HEC Lausanne in the past 11 years: Guido Imbens in 2010 (seminar plus swim in the lake), Joshua Angrist in 2013 (seminar and doctoral course), and David Card in 2016 (seminar and student conference). Camille Terrier visited Josh Angrist as a post-doc student at MIT for two years. Fabrizio Colella and Rafael Lalive wrote a paper with David Card to study the role of gender preference in job ads. John Antonakis who edits The Journal Leadership Quarterly demands that empirical work apply the Nobel laureates insights; his editorial policy is closely guided by a paper Antonakis did with Lalive on how to make causal claims in nonexperimental settings. Many scholars at HEC Lausanne apply similar insights in their everyday work in several departments of the school. The work of the three leading researchers awarded the Nobel Prize for Economics 2021 is a real source of inspiration for all these projects.
What is a natural experiment (compared to a laboratory experiment)?
Natural experiments differ from clinical trials in one important way – in a clinical trial, the researcher has complete control over who is offered a treatment and eventually receives it (the treatment group) and who is not offered the treatment and therefore does not receive it (the control group). In a natural experiment, the researcher also has access to data from treatment and control groups but, unlike a clinical trial, the individuals may themselves have chosen whether they want to participate in the intervention being offered. This makes it much more difficult to interpret the results of a natural experiment. In an innovative study from 1994, Joshua Angrist and Guido Imbens showed what conclusions about causation can be drawn from natural experiments in which people cannot be forced to participate in the programme being studied (nor forbidden from doing so). The framework they created has radically changed how researchers approach empirical questions using data from natural experiments or randomised field experiments.