Category: Economics

The Price of COVID-19 Risk In A Public University

Wow. Duha Altindag, Samuel Cole and R. Alan Seals Jr, three professors in the economics department at Auburn University, study their own university’s COVID policies. The administration defied the Alabama Governor’s public health order on social distancing and created their own policy which caused enrollment in about half of the face-to-face classes to exceed legal limits. Professors assigned to teach these riskier classes were less powerful, albeit they were paid more to take on the risk. I am told that the administration is not happy. I hope the authors have tenure.

We study a “market” for occupational COVID-19 risk at Auburn University, a large public school in the US. The university’s practices in Spring 2021 caused approximately half of the face-to-face classes to have enrollments above the legal capacity allowed by state law, which followed CDC’s social distancing guidelines. Our results suggest that the politically less powerful instructors, such as graduate student teaching assistants and adjunct instructors, as well as women, were systematically recruited to deliver their courses in riskier classrooms. Using the dispersibility of each class as an instrument for classroom risk, our IV estimates obtained from hedonic wage regressions show that instructors who taught at least one risky class were paid more than those who exclusively taught safe courses. We estimate a COVID-19 risk premium of $8,400 per class.

Optimism about Mexico a story of compounding returns

Current per capital income measures at about 19k PPP.  Apply 2.2% growth for 30-35 years and Mexico then approaches the living standard of today’s UK or South Korea!  Since 1994, Mexico’s average growth rate has been 2.09%, including Covid times, so that is hardly outlandish as an assumption.

Here is my latest Bloomberg column on that topic.  Here is one excerpt:

In the meantime, there are reasons to be bullish on Mexico right now. One is that economic globalization has been somewhat halted, and in some areas even reversed. To the extent Americans do not trust Chinese supply chains, the Mexican economy will pick up some of the slack. Mexico is also the natural lower-wage supplier to North American industry. (Its main problem in this regard is that its wages are no longer so low, but that too reflects its progress.)

And if tourism in Asia and Europe remains difficult or inconvenient, Americans will visit Mexico more and grow accustomed to holidaying in locales other than Cancun. Some of those habits are likely to stick.

I do also cover the ifs, and, or buts.  And:

Mexico, like much of Latin America, also has a burgeoning startup scene, especially in ecommerce and fintech. Mexico City might end up as the technology capital of [Spanish-speaking] Latin America. That would help with one of Mexico’s chronic economic problems, namely that small firms decide to stay small to escape regulations and taxes. Successful tech startups, in contrast, can scale more easily and face fewer regulations on average than manufacturing firms.


Make TeleMedicine Permanent

One of the silver linings of the pandemic was the ability to see a doctor and be prescribed medicine online. I used telemedicine multiple times during the pandemic and it was great–telemedicine saved me at least an hour each visit and I think my medical care was as good as if I had been in person. I already knew I had poison ivy! No need for the doctor to get it also.

Telemedicine has been possible for a long time. What allowed it to take off during the pandemic wasn’t new technology but deregulation. HIPAA rules, for example, were waived for good faith use of standard communication technologies such as Zoom and Facetime even though these would ordinarily have been prohibited.

The Federal Ryan Haight Act was lifted which let physicians prescribe controlled substances (narcotics, depressants, stimulants, hallucinogens, and anabolic steroids) in a telemedicine appointment–prior to COVID an in-person appointment was required.

Prior to COVID Medicaid and Medicare wouldn’t pay for many services delivered over the internet. But during the pandemic the list of telemedicine approved services was expanded. Tennessee, for example, allowed speech therapists to bill for an online session. Alaska allowed mental health and counseling services and West Virginia allowed psychological testing to be delivered via telemedicine. Wisconsin allowed durable medical equipment such as prosthetics and orthotics to be prescribed without a face-to-face meeting.

Another very important lifting of regulation was allowing cross-state licensing which let out-of-state physicians have appointments with in-state patients (so long, of course, as the physicians were licensed in their state of residence.)

The kicker is that almost all of these changes are temporary. Regulatory burdens that were lifted for COVID will all be reinstated once the Public Health Emergency (PHE) expires. The PHE has been repeatedly extended but that will only push off the crux of the issue which is whether many of the innovations that we were forced to adopt during the pandemic shouldn’t be made permanent.

Working from home has worked better and been much more popular than anyone anticipated. Not everyone who was forced to work at home because of COVID wants to continue to work at home but many businesses are finding that allowing some work from home as an option is a valuable benefit they can offer their workers without a loss in productivity.

In the same way, many telemedicine innovations pioneered during the pandemic should remain as options. No one doubts that some medical services are better performed in-person nor that requiring in-person visits limits some types of fraud and abuse. Nevertheless, the goal should be to ensure quality by regulating the provider of medical services not regulating how they perform their services. Communications technology is improving at a record pace. We have moved from telephones to Facetime and soon will have even more sophisticated virtual presence technology that can be integrated with next generation Apple watches and Fitbits that gather medical information. We want medical care to build on the progress in other industries and not be bound to 19th and 20th century technology.

The growth of telemedicine is one of the few benefits of the pandemic. As the pandemic ends, let’s make this silver lining permanent.

Is this the uh-oh moment for renewable energy?

That is the topic of my latest Bloomberg column, here is one excerpt:

American elites like to argue for a carbon tax and other means of raising the price of carbon emissions, and I fall into that camp myself. Yet higher energy prices are extremely unpopular with many voters. A recent study found that most Americans would vote against a mere $24 annual climate tax on their energy bills. Many countries now have to ask themselves if they really are ready to start paying the bills for a transition away from carbon.


…the Biden administration has been playing a two-sided game. Policies strongly discourage domestic producers from adding fossil-fuel capacity, and indeed those investments remain depressed. Perhaps that is how it should be. Yet when it comes to global capacity, America is talking and playing a very different hand.

For instance, the Biden administration has criticized OPEC for insufficient production of crude oil. National security adviser Jake Sullivan said bluntly: “At a critical moment in the global recovery, this is simply not enough.” That kind of policy talk is hard to square coming from the same government that has revoked permits for the Keystone XL pipeline, limited oil and gas leases on federal land and in Alaska, and used the Endangered Species Act to limit energy development on private lands in the West.

The federal government’s strategy seems clear. It is discouraging fossil-fuel capacity in the U.S. and Canada, but to keep energy prices low it will tolerate and indeed encourage high fossil-fuel spending in other, more distant nations. That would give the U.S. some domestic “trophies” in the fight to limit fossil fuels, yet without higher energy prices for the world at large.

The problem is that the same mix of policies won’t do much to limit overall carbon emissions. It will hurt American industry, by penalizing domestic energy production, and also damage U.S. energy independence.

So far I am not seeing a lot of evidence that the world really is willing to tolerate higher energy prices.  Countries all over are rushing back to coal — what are we supposed to conclude from that?

Fasten your seat belts…

New Stablecoin Charter Could Hinge on National Bank Act Rewrite

A special-purpose banking charter for stablecoin issuers – one of the potential options for federal regulators to rein in the risks posed by the digital asset – may require a revamp of the National Bank Act, the statute that defines the “business of banking,” analysts said in an American Banker piece this week. The prospect of the Biden Administration urging Congress to authorize such a charter was recently reported by the Wall Street Journal. The National Bank Act stipulates that the core activities for national banks are taking deposits, making loans and facilitating payments. The same statute is at the center of legal disputes over the OCC’s FinTech charter that would allow firms engaging in only one of those activities to receive a banking charter and essentially act as a bank.

That is from an email I received from BPInsights.

Why the IMF is intrinsically conservative and hard to reform

That is the topic of my latest Bloomberg column, here is one excerpt:

The IMF is used by the G-5 nations and their allies to put their reputational capital behind the international monetary order. Obviously, the backing countries are only going to underwrite a system that they largely approve of and benefit from.

If the IMF didn’t exist, failed nations still periodically would be bailed out by rich ones, if only because the G-5 politicians wouldn’t wish to endanger the stability of the global financial order. But problems would arise as the bailouts would have to be organized anew each time. Which nation would put in how much? Who would pull the plug on failing nations and when? Who or what would enforce repayment? All those questions are regularized and institutionalized through the existence of the IMF.

The cronyist element is that the G-5 nations use the IMF and its lending facilities to protect the creditworthiness of their own banks and financial systems. In contrast, an IMF serving “the citizens of the world,” whatever that might mean, would be an IMF without much support from the biggest and most important financial players. It would be more like the undercapitalized Unicef than an institution that can move world markets or help preserve them…

If the directorship and board governance of the IMF were picked by a vote from all 190 member countries, the leading G-5 nations would put much less of their reputational capital behind the institution. The IMF is an international public good, but such public goods only get produced when it is in somebody’s selfish interest to do so.

And to close:

Successful international economic orders typically have been based on a fair degree of hegemony, whether it was the British-led gold standard of the 19th century, or the more recent post-World War II American dominance. Once you realize that, a lot of the current questions about the IMF answer themselves rather automatically. The real issue isn’t how to improve the IMF, but how we are going to cope as current hegemonies continue to lose their sway.


Rising Markups and the Role of Consumer Preferences

That is a new paper by Hendrik Döpper, Alexander MacKay, Nathan Miller, and Joel Stiebale, with striking results:

We characterize the evolution of markups for consumer products in the United States from 2006 to 2019. We use detailed data on prices and quantities for products in more than 100 distinct product categories to estimate demand systems with flexible consumer preferences. We recover markups under an assumption that firms set prices to maximize profit. Within each product category, we recover separate yearly estimates for consumer preferences and marginal costs. We find that markups increase by about 25 percent on average over the sample period. The change is attributable to decreases in marginal costs that are not passed through to consumers in the form of lower prices. Our estimates indicate that consumers have become less price sensitive over time.

Of course under this hypothesis, the supposed increase in monopoly is not so daunting after all.  It would be an interesting question, however, why elasticity of demand might have fallen.  Better matching to consumers?  More complacency?  Goods and services are these days more addictive?

Model these Sweden Denmark lower inflation rates

Sweden’s annual inflation rate rose to 2.5 percent in September of 2021 from 2.1 percent in August but below market expectations of 2.7 percent. It was the highest since November of 2011, mainly due to prices of housing & utilities (5.1 percent vs 3.8 percent in August), namely electricity and transport (6.2 percent vs 6.4 percent), of which fuels. Additional upward pressure came from education (2.5 percent vs 2 percent); restaurants & hotels (2.4 percent vs 2.6 percent); miscellaneous goods & services (2 percent vs 1.4 percent) and food & non-alcoholic beverages (0.9 percent vs 0.3 percent). Consumer prices, measured with a fixed interest rate, rose 2.8 percent year-on-year in September, the fastest pace since October of 2008, below market expectations of 3 percent but above the central bank’s target of 2 percent. On a monthly basis, both the CPI and the CPIF rose 0.5 percent.

Here is the link, they are an open economy facing lots of supply shocks, right?  So what is up?

And Denmark:

Denmark’s annual inflation increased to 2.2% in September of 2021 from 1.8% in the previous month. It was the highest inflation rate since November 2012, due to a rise in both prices of electricity (15.2%), pointing to the highest annual increase since December 2008 and gas (52.8%), which is the highest annual increase since July 1980.

I thank Vero for the pointer.  In an email to me she asks:

“If supply issues are the only cause of our inflation woes, then why is it that countries that spent less than 5% of GDP on the pandemic are experiencing average inflation of 2.15%? While countries that spent over 15% of GDP are experiencing average inflation of 3.94%? I don’t know the answer but I think it is worth asking this question.”


Stripe v. Elrond! Crypto and the Payments System

Recently Elrond, the blockchain startup for which I am an advisor, bought a payments processor (conditional on approval from the Romanian government). On the same day, Stripe, the payments processor, announced that they are moving into crypto. None of this is coincidental. Elrond understand that the payments market is a multi-trillion dollar opportunity. Stripe knows that crypto innovation could undercut them very quickly if they aren’t prepared.

How did Stripe turn into a multi-billion dollar firm almost overnight? Obviously, Stripe is a great firm, led by the brilliant Collison brothers, CEO Patrick Collison and President John Collison. But it’s also important to understand that the payments market in the United States is a $100 trillion dollar market. Yes, $100 trillion. Any firm that captures even a small share of this market is going to be big. Credit cards are actually a small part of payments, about $7 trillion with roughly a 2% transaction fee or a $140 billion market. (Quick check. Credit card companies had 2020 revenues of $176 billion).  ACH debit and credit transfers are the big market, $65 trillion, which at a .5% transaction fee amounts to a $325 billion market (this is retail price, wholesale is lower). Thus, payments revenue is on the order of $465 billion. A small share of $465 billion is a very big market (and that is just the US market).

Now consider the following. Crypto payments are in principle at least an order of magnitude cheaper than ACH payments. On Elrond, for example, a very fast and low cost blockchain compared to Ethereum or Bitcoin, someone recently transferred $17.5 million for less than a penny. Moreover, crypto payments are global while every other payments system gets much more expensive as you cross borders. I recently sent $1500 to India and it cost me $100 in transaction fees! To be sure, payments made through the banking system have to obey “Know Your Customer” regulations and also include invoicing and billing services which adds both to value and cost. The main reason, however, that payments through the banking system are expensive is because the banking system rails are taped together with two hundred years of spit and duct tape.

Crypto payments are the future. Stripe knows it. Elrond knows it. The race is on.

NIMBY vs. YIMBY sentences to ponder

CZs means “commuting zones”:

We find that larger and higher‐earnings CZs have much higher housing costs than smaller or lower‐earnings CZs, enough so to more than completely offset their larger effects on nominal earnings. Thus, movements to larger or to higher earnings locations mean reductions in real income.

That is from a new paper by David Card, Jesse Rothstein, and Moises Yi.  Via Adam Ozimek.  Maybe this is a problem!

How do low real interest rates affect optimal tax policy?

Alan Auerbach and William Gale have a new paper on this topic:

Interest rates on government debt have fallen in many countries over the last several decades, with markets indicating that rates may stay low well into the future. It is by now well understood that sustained low interest rates can change the nature of long-run fiscal policy choices. In this paper, we examine a related issue: the implications of sustained low interest rates for the structure of tax policy. We show that low interest rates (a) reduce the differences between consumption and income taxes; (b) make wealth taxes less efficient relative to capital income taxes, at given rates of tax; (c) reduce the value of firm-level investment incentives, and (d) substantially raise the valuation of benefits of carbon abatement policies relative to their costs.

One core intuition here is that as the safe return goes to zero, capital taxes are not especially burdensome compared to consumption taxes.  Of course “the safe return” may not be entirely well-defined within a corporate context, and capital taxes often hit returns to risk as well, so this is a bit more complicated than the abstract alone would indicate.

The authors also offer this intuition, which I do not quite follow:

In simplified environments, a wealth tax can be written as an equivalent tax on capital income. As the rate of return falls, the equivalent income tax rate of any given wealth tax rises. That is, a given wealth tax rate becomes more distortionary relative to a given capital income tax as the rate of return falls.

One of my biggest worries about a wealth tax is that it takes resources away from people who at the margin seem to be good at generating extra-normal returns.  That comparative advantage might be more important as the safe rate goes to zero.  So I am fine with the conclusion of the authors, but not sure if their intuition is equivalent to mine (I suspect it is not).

This one is clearer to me:

A major focus of potential tax reform has been the treatment of capital gains, given their tax-favored status, their high concentration among the very wealthy, and the distortions that the current method of taxation causes. A key element of the current system of capital gains taxation
is the lock-in effect, which discourages the realization of gains to take advantage of deferral of taxation. With very low interest rates, the deferral advantage loses much of its relevance, and this can make relatively simple reforms (such as taxing capital gains at death) achieve results very similar to more complicated schemes (such as taxing capital gains on accrual, even when not realized).

Overall this paper is very interesting and thought-provoking.  Nonetheless, until we understand better why the safe rate of return has diverged so radically from “typical” (but still risky) corporate rates of return, I am not sure what implications we can draw from the model.

Thinking about broken supply chains

That is the topic of my latest Bloomberg column.  Here is one bit:

Most fundamentally, some key nerve centers of the world economy have been hit by a mix of Covid and bad luck, especially in the latter part of this year. Transportation, energy and high-quality semiconductor chips all are experiencing big problems at the same time, for reasons which are distinct yet broadly related.


This combination has fueled price inflation. The demand is hitting the market, and the supply can’t catch up. And it’s not just one problem that has an easy, direct fix, but rather a series of interlocking paths of economic chaos and delay.

Don’t expect all of your Christmas shopping to run smoothly!

Covid scam arbitrage

It sounded like the ultimate COVID-era travel bargain: five-star hotels in Manhattan at a 60 percent discount. “I do not know exactly what hotel u would be place but I know it would be 5 star hotel … be cash app ready!!” read a Facebook post hyping the deal. A Cash App–only hotel promotion might raise a few red flags, but trust that the rooms were very much real — they were just supposed to be set aside for COVID patients and health-care providers. The scam was uncovered after four months of excellent business, and this week, federal prosecutors charged Chanette Lewis with fraudulently booking New York’s emergency COVID hotel rooms using health-care workers’ stolen personal information. Lewis, 30, and three other accomplices are alleged to have advertised the rooms on Facebook and to have made a whopping $400,000 by booking more than 2,700 nights’ worth of stays in the spring and summer of last year.

Lewis, whose actual job was to book quarantine rooms on behalf of the city, had access to health-care workers’ personal information through her work at the Office of Emergency Management. But she allegedly used their credentials to book stays for her guests instead, making it look like they had been exposed to COVID. “I stole some doctor numbers and emails … I was writing down they employed ID number lmao,” prosecutors say Lewis wrote in a Facebook message. The hotel rooms, which would normally run hundreds of dollars a night, went for only $50 a night and $150 for the week. She then took the cash, prosecutors say, and the city was billed for the rooms. The grift went so well that Lewis recruited others to help her out. “I wanna teach u the ropes of it,” she messaged her co-conspirator Tatiana Benjamin, 26, in June. Her guests did the opposite of quarantine; some threw parties and, as one special agent for the U.S. Attorney ominously put it, “engaged in violence.”

Here is the full story, via Air Genius Gary Leff.

The First Nobel Prize for Marginal Revolution University!

The Nobel Prize in economics this year goes to David Card, Joshua Angrist and Guido Imbens. I describe their contributions in greater detail in A Nobel Prize for the Credibility Revolution.

It’s also fun to note that Joshua Angrist mostly teaches at MIT but he also teaches a course on Mastering Econometrics at Marginal Revolution University so this is our first Nobel Prize! Here is Master Joshua on instrumental variables.

A Nobel Prize for the Credibility Revolution

The Nobel Prize goes to David Card, Joshua Angrist and Guido Imbens. If you seek their monuments look around you. Almost all of the empirical work in economics that you read in the popular press (and plenty that doesn’t make the popular press) is due to analyzing natural experiments using techniques such as difference in differences, instrumental variables and regression discontinuity. The techniques are powerful but the ideas behind them are also understandable by the person in the street which has given economists a tremendous advantage when talking with the public. Take, for example, the famous minimum wage study of Card and Krueger (1994) (and here). The study is well known because of its paradoxical finding that New Jersey’s increase in the minimum wage in 1992 didn’t reduce employment at fast food restaurants and may even have increased employment. But what really made the paper great was the clarity of the methods that Card and Krueger used to study the problem.

The obvious way to estimate the effect of the minimum wage is to look at the difference in employment in fast food restaurants before and after the law went into effect. But other things are changing through time so circa 1992 the standard approach was to “control for” other variables by also including in the statistical analysis factors such as the state of the economy. Include enough control variables, so the reasoning went, and you would uncover the true effect of the minimum wage. Card and Krueger did something different, they turned to a control group.

Pennsylvania didn’t pass a minimum wage law in 1992 but it’s close to New Jersey so Card and Kruger reasoned that whatever other factors were affecting New Jersey fast food restaurants would very likely also influence Pennsylvania fast food restaurants. The state of the economy, for example, would likely have a similar effect on demand for fast food in NJ as in PA as would say the weather. In fact, the argument extends to just about any other factor that one might imagine including demographics, changes in tastes and changes in supply costs. The standard approach circa 1992 of “controlling for” other variables requires, at the very least, that we know what other variables are important. But by using a control group, we don’t need to know what the other variables are only that whatever they are they are likely to influence NJ and PA fast food restaurants similarly. Put differently NJ and PA are similar so what happened in PA is a good estimate of what would have happened in NJ had NJ not passed the minimum wage.

Thus Card and Kruger estimated the effect of the minimum wage in New Jersey by calculating the difference in employment in NJ before and after the law and then subtracting the difference in employment in PA before and after the law. Hence the term difference in differences. By subtracting the PA difference (i.e. what would have happened in NJ if the law had not been passed) from the NJ difference (what actually happened) we are left with the effect of the minimum wage. Brilliant!

Yet by today’s standards, obvious! Indeed, it’s hard to understand that circa 1992 the idea of differences in differences was not common. Despite the fact that differences in differences was actually pioneered by the physician John Snow in his identification of the causes of cholera in the 1840 and 1850s! What seems obvious today was not so obvious to generations of economists who used other, less credible, techniques even when there was no technical barrier to using better methods.

Furthermore, it’s less appreciated but not less important that Card and Krueger went beyond the NJ-PA comparison. Maybe PA isn’t a good control for NJ. Ok, let’s try another control. Some fast food restaurants in NJ were paying more than the minimum wage even before the minimum wage went into effect. Since these restaurants were always paying more than the minimum wage the minimum wage law shouldn’t influence employment at these restaurants. But these high-wage fast-food restaurants should be influenced by other factors influencing the demand for and cost of fast food such as the state of the economy, input prices, demographics and so forth. Thus, Card and Krueger also calculated the effect of the minimum wage by subtracting the difference in employment in high wage restaurants (uninfluenced by the law) from the difference in employment in low-wage restaurants. Their results were similar to the NJ-PA comparison.

The importance of Card and Krueger (1994) was not the result (which continue to be debated) but that Card and Krueger revealed to economists that there were natural experiments with plausible treatment and control groups all around us, if only we had the creativity to see them. The last thirty years of empirical economics has been the result of economists opening their eyes to the natural experiments all around them.

Angrist and Krueger’s (1991) paper Does Compulsory School Attendance Affect Schooling and Earnings? Is one of the most beautiful in all of economics. It begins with a seemingly absurd strategy and yet in the light of a few pictures it convinces the reader that the strategy isn’t absurd but brilliant.

The problem is a classic one, how to estimate the effect of schooling on earnings? People with more schooling earn more but is this because of the schooling or is it because people who get more schooling have more ability? Angrist and Krueger’s strategy is to use the correlation between a student’s quarter of birth and their years of education to estimate the effect of schooling on earnings. What?! What could a student’s quarter of birth possibly have to do with how much education a student receives? Is this some weird kind of economic astrology?

Angrist and Krueger exploit two quirks of US education. The first quirk is that a child born in late December can start first grade earlier than a child, nearly the same age, who is born in early January. The second quirk is that for many decades an individual could quit school at age 16. Put these two quirks together and what you get is that people born in the fourth quarter are a little bit more likely to have a little bit more education than similar students born in the first quarter. Scott Cunningham’s excellent textbook on causal inference, The Mixtape, has a nice diagram:

Putting it all together what this means is that the random factor of quarter of birth is correlated with (months) of education. Who would think of such a thing? Not me. I’d scoff that you could pick up such a small effect in the data. But here come the pictures! Picture One (from a review paper, Angrist and Krueger 2001) shows quarter of birth and total education. What you see is that years of education are going up over time as it becomes more common for everyone to stay in school beyond age 16. But notice the saw tooth pattern. People who were born in the first quarter of the year get a little bit less education than people born in the fourth quarter! The difference is small, .1 or so of a year but it’s clear the difference is there.

Ok, now for the payoff.  Since quarter of birth is random it’s as if someone randomly assigned some students to get more education than other students—thus Angrist and Krueger are uncovering a random experiment in natural data. The next step then is to look and see how earnings vary with quarter of birth. Here’s the picture.

Crazy! But there it is plain as day. People who were born in the first quarter have slightly less education than people born in the fourth quarter (figure one) and people born in the first quarter have slightly lower earnings than people born in the fourth quarter (figure two). The effect on earnings is small, about 1%, but recall that quarter of birth only changes education by about .1 of a year so dividing the former by the latter gives an estimate that implies an extra year of education increases earnings by a healthy 10%.

Lots more could be said here. Can we be sure that quarter of birth is random? It seems random but other researchers have found correlations between quarter of birth and schizophrenia, autism and IQ perhaps due to sunlight or food-availability effects. These effects are very small but remember so is the influence of quarter of birth on earnings so a small effect can still bias the results. Is quarter of birth as random as a random number generator? Maybe not! Such is the progress of science.

As with Card and Kruger the innovation in this paper was not the result but the method. Open your eyes, be creative, uncover the natural experiments that abound–this was the lesson of the credibility revolution.

Guido Imbens of Stanford (grew up in the Netherlands) has been less involved in clever studies of empirical phenomena but rather in developing the theoretical framework. The key papers are Angrist and Imbens (1994), Identification and Estimation of Local Treatment Effects and Angrist, Imbens and Rubin, Identification of Causal Effects Using Instrumental Variables which answers the question: When we use an instrumental variable what exactly is it that we are measuring? In a study of the flu, for example, some doctors were randomly reminded/encouraged to offer their patients the flu shot.  We can use the randomization as an instrumental variable to measure the effect of the flu shot. But note, some patients will always get a flu shot (say the elderly). Some patients will never get a flu shot (say the young). So what we are really measuring is not the effect of the flu shot on everyone (the average treatment effect) but rather on the subset of patients who got the flu shot because their doctor was encouraged–that latter effect is known as the local average treatment effect. It’s the treatment effect for those who are influenced by the instrument (the random encouragement) which is not necessarily the same as the effect of the flu shot on groups of people who were not influenced by the instrument.

By the way, Imbens is married to Susan Athey, herself a potential Nobel Prize winner. Imbens-Athey have many joint papers bringing causal inference and machine learning together. The Akerlof-Yellen of the new generation. Talk about assortative matching. Angrist, by the way, was the best man at the wedding!

A very worthy trio.