1. INTRODUCTION TO RESEARCH METHODS IN ECONOMICS Topic 2 Types of Research These slides are copyright © 2010 by Tavis Barr. This work is licensed under a Creative Commons Attribution- ShareAlike 3.0 Unported License. See http://creativecommons.org/licenses/by-sa/3.0/ for further information.http://creativecommons.org/licenses/by-sa/3.0/

2. The Types of Research ● Theoretical Research ● Qualitative Empirical Research – Case Studies – Ethnographic studies ● Quantitative Empirical Research ● Experimental Research

3. Theoretical Reseach ● Mostly deductive: Seeks new conclusions from current assumptions ● There may be no theory that is consistent with current assumptions – Keynesian economics assumes wages are lower during economic booms, but they're not (Dunlop (1938), Tarshis (1939)) – A framework of business cycles with higher wages in booms was not forumlated until Rotemberg and Saloner (1987)

4. ● Sometimes inductive: Common assumptions can lead to plainly false conclusions – Gary Becker (1971): If labor markets are perfectly competitive, then firms cannot discriminate Theoretical Research

5. Qualitative Empirical Research ● Research into new areas often begins this way ● Often we do not know enough about a phenomenon to make precise hypothesis ● We look for the general rules governing the phenomenon under study

6. Qualitative Empirical Research ● Case Study – Takes one case (or a few cases) of a phenomenon and studies it in excruciating detail – Common in business: Study a success or a failure – Happens even in the natural sciences: Darwin and the Galapagos Islands

7. Qualitative Empirical Research ● Case Study Types: – Snapshot: Detailed study of entity at one point in time. Tests hypotheses by comparing sub-entities (e.g., departments) – Longitudinal: Follows the subject over time – Pre-Post: Surveys subject before and after big event – Patchwork: A combination of the above

8. Qualitative Empirical Research ● Case Study Considerations: – Selection should be theory-driven. If theory has typologies (e.g., success vs. failure), choose one case from each typology – Pattern matching can show whether cases are consistent with predictions of theory.

9. Qualitative Empirical Research ● Grounded Theory – Sometimes called multi-case study – Develop a theory based on one case, then test and refine based on subsequent cases – May choose cases in which one dependent variable is similar (or different) to discover why – Often used by sociologists

10. Qualitative Empirical Research ● Ethnography – Researcher spends a long time with a group of subjects – Traditionally used by anthropologists – Traditionally, the group is a people or tribe – Today, a group could be a school or a sports team

11. Qualitative Empirical Research ● Ethnographic Method – Attempts to establish relationships between beliefs and exhibited behavior or customs – Attempts to describe beliefs and behavior of subjects in subjects' terms and language

12. Quantitative Empirical Research ● We formulate specific and precise questions that can be answered by statistical data ● Most often we are testing a hypothesis ● We then collect the data and see whether the hypothesis is consistent with the data

13. Quantitative Empirical Research ● Methodology is simpler than qualitative research ● But it often takes longer: Identifying, collecting, and analyzing appropriate data is difficult and expensive

14. Quantitative Hypothesis Testing ● A population is a collection of all possible individuals, objects, or measurements of interest. ● Examples of pop'n data: – Population Census (everyone in a country) – International Financial Statistics (aggregate data for every country)

15. Quantitative Hypothesis Testing ● Usually our hypothesis is about the population – “A dropped object falls at 9.8 m/s 2 ” – “A majority of Ethiopians eats less than 2,000 calories per day” – “The demand for clothes is inelastic” ● Why not study the entire population? – It may be too costly (e.g., every person in Ethiopia) – It may be infeasible (e.g., every object dropped)

16. ● A sample is a subset of a population. – Opinion poll of 1000 Ethiopian adults – Survey of 300 employers – Dropping 1000 objects to measure gravity ● Sample should be random or representative (everyone equally likely to be included) Quantitative Hypothesis Testing

17. ● But if we only have a sample, how can we make conclusions about the population? ● Inferential Statistics: Using properties of a sample to make conclusions about the population ● Descriptive Statistics: Only stating facts about the sample Quantitative Hypothesis Testing

18. ● Key to Inferential Statistics: The Central Limit Theorem – If a sample: 1.Consists of independent and identically distributed observations 2.Comes from a population with a finite mean and a finite standard deviation 3.Has at least 30 observations – Then the sample mean follows a normal distribution: X ~ N(,/n.5 )

19. Quantitative Hypothesis Testing ● We can make the population mean endogenous and the sample mean exogenous: X ~ N(,/n.5 ) or ~ N( X,/n.5 ) ● This implies that if we know the sample mean and standard deviation and number of observations, we know with probability what the population mean is

20. Quantitative Hypothesis Testing ● The order of a hypothesis test: 1.The null hypothesis (H 0 ) and the alternative hypothesis (H 1 ) is stated 2.A level of significance is decided on 3.A test statistic is selected 4.A decision rule is selected, usually involving a critical value. Usually we want to develop a confidence interval for the population parameter at the critical value. 5.A sample is collected, and the statistic and its critical value is determined

21. Quantitative Hypothesis Testing ● The main point: We decide on our hypothesis and the setup of the test before we collect the data ● The reason: We don't want to influence our hypothesis so that we know beforehand whether or not we will reject it

22. Quantitative Hypothesis Testing ● We don't want to influence our hypothesis so that we know beforehand whether or not we will reject it ● Example: – You have a sample of 100 store clerks. The average store clerk in the sample works 50 hours per week with a standard deviation of 15 hours per week. – What hypotheses could you reject or not reject based on your knowledge of the sample?

23. Quantitative Hypothesis Testing ● Sometimes we want to treat “population” data as a sample to make inferences ● Example: – Every industry in Ethiopia has some characteristics (output per worker, pay, etc.) – These describe industries that exist (pop'n) – What if we want to predict the range of possibilities for a new industry?

24. Experimental Research ● Seeks to determine the relationship between a dependent variable and an independent variable ● Fundamentally divides subjects into two groups: Ind. Variable Dep. Variable Experimental GroupChanged Measured Control GroupUnchanged Measured

25. Experimental Research ● Examples: – A human resources team is responsible for two factories. In one factory, they raise the lighting and play music. What happens to worker output? – An agricultural scientist wants to test the effects of a fertilizer. He takes two adjacent fields; he uses the new fertilizer in one and a traditional fertilizer in the other.

26. Experimental Research ● Ideally, the only difference between the experimental group and the control group is the independent variable ● Then all differences between the two groups must result from the difference in that variable ● The problem: Extraneous factors – other variables that differ between the two groups

27. Experimental Research ● Means of controlling for extraneous factors: – Randomization: Randomly select with respect to these factors so sample is representative – Homogeneity: If extraneous factors are the same for all subjects, their variation cannot explain variation in outcome – Matching: Make factors similar in experimental and control groups – Incorporation into design: Account for all values of extraneous factors and measure their effects. Expensive.

28. Experimental Research ● Experimental research in economics: – Mostly behavioral. Economists want to know if people follow common economic assumptions in everyday life – Do they behave in a self-interested way? – Do they consider all options fully? – Do they cooperate?

29. Experimental Research ● Example: The Ultimatum Game – There are two people and two steps – In step 1, person 1 announces to person 2 a way to split $10 (I get $5, you get $5; I get $9, you get $1, etc.) – Person 2 either accepts or rejects – If person 2 accepts, they split $10 that way. If person 2 rejects, neither gets anything.

30. Experimental Research ● Example: The Ultimatum Game – There have been numerous studies showing cross-cultural differences in strategies (see Henrich et al (2005))

31. Experimental Research ● Other experiments: – Cooperation and learning: ● People choose “A” or “B” not knowing what the other chose. ● If both choose the same, they get a reward. Otherwise, nothing. ● How long does it take them to settle on “A” or “B”? – People are offered different amounts with different probabilities: $1 with probability 0.9; $10 with probability 0.09; $1,000 with probability 0.0005. Which do they choose?

32. Experimental Research ● Natural experiment: Something beyond the researcher's control created a difference between to otherwise identical groups – Education becomes compulsory in one state – Abortion becomes legal but is only used in some areas – A storm destroys half of the crop in one area but not another ● Controls may be difficult to implement