A Market Interpretation of Treatment Effects

Robert Minton and Casey Mulligan

No 33228, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Markets, likened to an invisible hand, often appear to contradict econometric assumptions that rule out spillovers of one person’s treatment on another’s outcomes. This paper provides a simple statistical framework highlighting that controls are indirectly affected by the treatment through the market. Further, the effect of the treatment on the treated reveals only part of the consequence for the treated of treating the entire market. When combined with economic theory, our framework leads to a new application of Marshall’s Laws of Derived Demand that relates econometric estimates of treatment effects in the marketplace to the substitution and scale effects of demand theory. We show how treatment-effect estimators can diverge – both in magnitude and direction – from the causal effects of treatment on the treated or counterfactual policies treating all market participants. The framework shows how the consequences of targeted treatments reveal the effects of marketwide treatments, and the role of market frictions in that inference. Examples from labor, public finance, economic geography, development, and the macro literature on the “missing intercept” are provided.

JEL-codes: C21 D41 L11 (search for similar items in EconPapers)
Date: 2024-12
New Economics Papers: this item is included in nep-geo
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