Large Language Models: An Applied Econometric Framework

Large language models (LLMs) enable researchers to analyze text at unprecedented scale and minimal cost. Researchers can now revisit old questions and tackle novel ones with rich data. We provide an econometric framework for realizing this potential in two empirical uses. For prediction problems – forecasting outcomes from text – valid conclusions require “no training leakage” between the LLM’s training data and the researcher’s sample, which can be enforced through careful model choice and research design. For estimation problems – automating the measurement of economic concepts for downstream analysis – valid downstream inference requires combining LLM outputs with a small validation sample to deliver consistent and precise estimates. Absent a validation sample, researchers cannot assess possible errors in LLM outputs, and consequently seemingly innocuous choices (which model, which prompt) can produce dramatically different parameter estimates. When used appropriately, LLMs are powerful tools that can expand the frontier of empirical economics.