• IO vs Labor Economics

    The response by Nevo and Whinston to the forthcoming Journal of Economics Perspectives paper by Angrist and Pischke (about which I’ve been writing) is illuminating. It clearly delineates some key differences between industrial organization (IO) and labor economics. Some key passages:

    However, empirical analysis must deal not only with credible inference, but also with what might be called “generalization,” “extrapolation,” or “external validity”. … This is where structural analysis comes in. Structural analysis is not a substitute for credible inference. Quite to the contrary, in general, structural analysis and credible identification are complements. …

    Structural analysis gives us a way to relate observations of responses to changes in the past to predict the responses to different changes in the future.

    It does so in two basic steps. First, it matches observed past behavior with a theoretical model to recover fundamental parameters such as preferences and technology. Then, the theoretical model is used to predict the responses to possible environmental changes, including those that have never happened before, under the assumption that the parameters are unchanged. …

    Empirical work in industrial organization does differ in some striking ways from that in labor (and other fields that emphasize estimation of treatment effects). We have discussed extensively one important difference, the heavier reliance on structural modeling (and greater attention to issues this raises) in industrial organization, but this is not the only difference.

    Empirical papers in industrial organization are also less likely than are papers in labor to focus on pinning down a particular “number”–like an elasticity or a price effect. Many structural papers in industrial organization, for example, are focused on showing that an approach to answering a question is feasible.

    The paper is worth a full read.

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