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Can Policy Changes Be Treated as Natural Experiments? Evidence from State Excise Taxes

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    Abstract

    An important issue in public policy analysis is the potential endogeneity of the policies under study. If policy changes constitute responses on the part of political decision-makers to changes in a variable of interest, then standard analyses that treat policy changes as natural experiments may yield biased estimates of the impact of the policy (Besley and Case 2000). We examine the extent to which such political endogeneity biases conventional fixed effects estimates of behavioral parameters by identifying the elasticities of demand for cigarettes and beer using the timing of state legislative elections as an instrument for changes in state excise taxes. In both cases, we find sizable differences between these estimated demand elasticities and the fixed effect estimates cited in Evans, Ringel, and Stech (1999). We conclude that the use of fixed effects estimators in environments where policy interventions are endogeneously determined may lead to large biases in the estimated effects of the policies. This paper was revised July 2002.

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    Bibliographic Info

    Paper provided by Center for Policy Research, Maxwell School, Syracuse University in its series Center for Policy Research Working Papers with number 39.

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    Length: 57 pages
    Date of creation: Sep 2001
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    Handle: RePEc:max:cprwps:39

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    Cited by:
    1. Jeffrey D. Kubik & John R. Moran, 2001. "Lethal Elections: Gubernatorial Politics and the Timing of Executions," Center for Policy Research Working Papers 40, Center for Policy Research, Maxwell School, Syracuse University.

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