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Making causal inferences in economics: Do better grades lead to higher salaries?

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In a previous post I discussed the changing nature of the economics profession and the importance of achieving the experimental ideal in social science research. I briefly discussed the logic and even some methodological approaches that are useful in achieving randomization, or at least as-if randomization in order to make our treatment and control groups as similar as possible for comparison. In this post I'll use an example that I like to teach to students to illustrate how we can make causal inferences using natural experiment research designs. A quick reminder: natural experiments are not experiments per se. They only provide us a good way to exploit observational data to emulate an experimental setting. 
Let's use the very basic example and look at the relationship between student grades and earnings – a topic is usually heatedly discussed among students – do better grades result in higher salaries?
Consider the following correlation between grades and earnings shown on …

2017 Nobel prize in Economics goes to Richard Thaler

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A well-deserved Nobel prize for a man that helped establish a new field of behavioral economics, disrupted the academic milieu in the rigid field of finance, and successfully started implementing his ideas as actual policies in a number of countries (most famously through the Nudge Unit in the UK - officially Behavioural Insights Team - set up under Cameron's administration, and the White House Social and Behavioral Science Team, set up under Obama's administration). It wouldn't be exaggerating to say that Thaler's scientific contributions were among the most applicable of all Nobel prize winning contributions in economics thus far (even more than Roth's kidney markets, Fama's EHM and Shiller's Irrational Exhuberance, or Deaton's measurements of poverty and inequality, to name just a few most recent notable laureates). 

It's been 15 years since behavioral economics has been recognized for the first time by the Nobel Committee, awarding it to Daniel…

Is economics getting better? Yes. It is.

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I attended two great conferences last week. The first one was an econ conference I co-organized with my friends and colleagues Dr Dejan Kovac and Dr Boris Podobnik, which featured three world-class economists from Princeton and MIT: professors Josh Angrist, Alan Krueger, and Henry Farber. The second was the annual American Political Science Association conference in San Francisco. I am full of good impressions from both conferences, but instead of talking about my experiences I will devote this post to one thing in particular that caught my attention over the past week. A common denominator, so to speak. Listening to participants present their excellent research in a wide range of fields, from economics to network theory (in the first conference), from political economy to international relations (in the second), I noticed an exciting trend of increasing usage of scientific methods in the social sciences. Methods like randomized control trials or natural experiments are slowly becomin…

Vote buying with intergovernmental grants (my paper published in Public Choice)

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When I started working in the academia a few years back, my friend and co-author Josip Glaurdić asked me which journal would I like to be published in the most? Without hesitation I said: Public Choice
Well, that goal has now been accomplished. I have a publication in one of my all time favorite political economy journals! You can read the paper on this link, it's been published online first. Next big goal: Quarterly Journal of Economics (I will also accept American Economic Review, Journal of Political Economy or American Political Science Review). 
Our paper is on the political bias in the allocation of intergovernmental grants in Croatia. Here's the abstract:  "Instead of alleviating fiscal inequalities, intergovernmental grants are often used to fulfill the grantors’ political goals. This study uses a unique panel dataset on more than 500 Croatian municipalities over a 12-year period to uncover the extent to which grant distribution is biased owing to grantors’ elect…

This Trumpian neomercantilism is ridiculous!

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Protectionism never helped anyone. Particularly among the developed nations. I have yet to encounter a case of a rich country becoming even richer after imposing tariffs and trade restrictions. Even when looking at firm-level data over the long run, protectionism never helped. In many cases it arguably made them even less efficient (I provide a real-life example below). The notion that tariffs (taxes on imports) and quotas (limits on import quantities) are in general bad for the economy that imposes them could even be called a stylized fact of the profession. And it is one of those rare 'facts' a vast majority of economists would agree with; even those who like to emphasize that free trade has both winners and losers, and even those who cite the successes of South Korea or China in using state protectionism of infant industries to gain a competitive advantage abroad (although there are a lot more factors explaining their success - plus I have yet to see a good piece of resear…