The Prize in Economic Sciences 2021: How Natural Experiments Help Answer Important Questions for Society

The Prize of the Sveriges Riksbank in Economic Sciences 2021 is awarded to three professors who have spent their careers carrying out experiments in real life. It is the mark of the supremacy of the so-called “credibility revolution”.

David Card, a professor at the University of California, Berkeley, shares the prize with Massachusetts Institute of Technology professor Joshua D. Angrist and Stanford University professor Guido W. Imbens. Half of the prize is awarded to Card and the other half jointly to Angrist and Imbens.

Revolutionised Empirical Research

For three decades they led the charge away from a focus on economic theory towards showing what conclusions about cause and effect can be drawn from natural experiments – real-life situations where chance events or policy decisions create similar conditions to those of a clinical trial.

Eva Mörk, a member of the Committee for the Prize in Economic Sciences, said that the prize was for answering questions about causality when it is not possible to conduct randomised experiments, which is often the case in social sciences. “I think it’s totally revolutionised the way we do empirical work,” she said.

In the official announcement, the members of the Prize Committee said the approach taken by the three economists had spread to other fields and revolutionised empirical research.

Answers to Key Causal Questions

Announcing the prize, Peter Fredriksson, chair of the Economic Sciences Prize Committee, said Card’s studies of core questions for society and Angrist’s and Imbens’ methodological contributions had shown that natural experiments were a rich source of knowledge. “Their research has substantially improved our ability to answer key causal questions, which has been of great benefit to society”, he said.

Starting in the early 1990s, Card made a number of contributions to show that it was possible to answer important questions using natural experiments in areas of labour economics, such as the effects of minimum wages, immigration and education.

Examples for Natural Experiments

One of his most significant studies with his late research partner Alan Krueger compared the earnings of fast-food workers in the adjacent US states of Pennsylvania and New Jersey, after the latter introduced a higher minimum wage. Contrary to the then-prevailing wisdom, he found that increasing the minimum wage did not necessarily lead to fewer jobs. In fact, employment actually went up in New Jersey’s fast-food restaurants relative to Pennsylvania’s.

He also found that an influx of immigrants had a minimal impact on employment levels among local workers with low education levels, using data from the mass immigration of 125,000 Cubans to Miami in 1920. Another experiment showed that resources in schools were far more important for students’ future labour market success than was previously thought.

Angrist and Krueger tried to gauge how much benefit people derive from extra years of education. They based their research on the fact that students born earlier in the year can legally leave school earlier than those born later in the year. Those born earlier tended to get less education and also earned less later on. The effect of an additional year of education, they estimated, was a 9 per cent increase in income.

Difficult Interpretation of Data

However this led to concerns that data from a natural experiment were difficult to interpret raising questions about whether the findings might be the result of corelation rather than causation. For example, will extending compulsory education benefit everyone when some pupils might have stayed on anyway? Are those students who choose to study longer more likely to benefit most from it?

This led Angrist and Imbens who are close friends as well as professional colleagues – Angrist was actually Imben’s best man at his wedding in 2002 – to investigate whether it was possible to draw precise conclusions about cause and effect from natural experiments.

They solved methodological problems to show that precise conclusions about cause and effect could be drawn from them and came up with a transparent framework for such research that has increased trust in it.

Many economists were keen to applaud their achievements. Writing on the VoxEU blog, Professor Jörn-Steffen Pischke at the London School of Economics, said: “The natural experiment methodology has not just swept through labour economics but many other fields of economics as well.” In a tweet, Trevon D. Logan, an economics professor at Ohio State University, said: “They ushered in a new phase in labor economics that has now reached all fields of the profession.”

Many economists noted with sadness that Alan Krueger, who passed away in 2019, would almost certainly have shared in this prize. Nobel Prizes and the Prize in Economic Sciences are not typically awarded posthumously. As Dani Rodrik, a professor of international political economist at Harvard University, said in a tweet: “[I] can’t help but think of Alan Krueger, who surely would have been included alongside Card.”

Prize 2019 for Experiment-Based Research

The 2021 Prize was the latest to be awarded for work based on real-life experiments. In 2019 Abhijit Banerjee and Esther Duflo of MIT and Michael Kremer of Harvard University won for their experiment-based research in development economics. They introduced a new approach to obtaining reliable answers about the best ways to fight global poverty.

David Card

David Card is the Class of 1950 Professor of Economics at the University of California, Berkeley and Director of the Labor Studies Program at the National Bureau of Economic Research. He was born in 1956 in Guelph, Canada.

He received his PhD in Economics in 1983 from Princeton University. In 1995 he received the American Economic Association’s John Bates Clark Prize.

Joshua D. Angrist

Joshua D. Angrist is the Ford Professor of Economics at MIT and a Research Associate at the National Bureau of Economic Research. He was born in 1960 in Columbus, Ohio. He is dual US and Israeli citizen. He received his PhD in Economics in 1989 from Princeton University. He is the co-founder and director of MIT’s Blueprint Labs.

Guido W. Imbens

Guido W. Imbens is the Applied Econometrics Professor and Professor of Economics at the Stanford Graduate School of Business. He was born in 1963 in Geldrop, the Netherlands. He is dual US and Dutch citizen. He received his PhD in Economics in 1991 from Brown University.