EC 331: Research in Applied Economics
Terms 1 & 2: Thursday, 2 - 3pm, H1.03
Vera E. Troeger
Office: S0.75
Email: v.e.troeger@warwick.ac.uk
Office hours: Thursday 10am – 12noon
Research Design
The Purpose of (Social) Science

development of useful and valid theories

reduction of complexity

explanation of (single) cases

derivation of correct predictions

derivation of useful prescriptions

else?
Note: all these purposes can be reduced to the first purpose!
The Problem of Inference
“Scientific research is designed to make descriptive of explanatory inferences on the
basis of empirical information about the world.” (KKV 7)
Inference is the generalization of observations.
Therefore, inference provides one way of formulating theories.
Consistent deductions from a set of assumptions provide another way.
Models of Theory Development and Validation:
Observation -> Explanation -> Generalization -> Prediction -> Test
Note: one cannot test an explanation/generalization based on the information that were
used for the inductive formulation of a theory.
Example: Democratic Peace
This process is called induction.
Assumptions -> Causal Mechanism -> Prediction
-> Selection of Useful Cases -> Test
Example: Downs’ Economic Theory of Democracy
This process is called deduction.
Deductive approach
THEORY
(supplying initial
theoretical assumptions)
Inductive approach
Empirical Observation
(of a sample of the
instances for which a
governing law is sought)
Predictive
hypotheses
Predictive
hypotheses
specific
observations
THEORY
(a statement of
governing laws)
Deductive logic:
Incuctive logic:
If X then Y (hypothesis)
Y (observation)
Then X
All observed X -> Y (observation)
X always -> Y (generalization)
X causes Y (inductive inference)
Source: Hay, C. 2002: Political Analysis: A Critical Introduction, Palgrave, p. 31.
Social Science Theories
What is a theory?
Conditions:
--
assumptions
--
causal mechanism (explanation)
--
derived hypotheses (predictions)
Consequences:
Theories must be
consistent (predictions need to follow from assumptions,
not tautological (predictions need to be logically distinguishable from assumptions)
falsifiable (probability of predictions being wrong must be positive)
Theories should be
-- parsimonious (they should consist of as many elements as necessary, but not more)
-- non trivial (the consumer of theories should learn something)
-- useful ?
-- elegant ?
Assumptions
• Are part of the core of a theory and therefore often un-testable
• Theoretical arguments are always based on implicit or explicit assumptions (e.g. About
behaviour of actors etc.)
• It is desirable to make assumptions of a theory explicit
• Basic assumptions often follow from the underlying paradigm
• Example: actors behave instrumentally rational, institutional and cultural background
forms preferences and behaviour of actors, knowledge is always partial and never
neutral, the political world is a product of social construction
Causality
Basic rules for causal explanation – the perspective of Jon Elster:
 Causal explanations must be distinguished from true causal statements
 Causal explanations must be distinguished from assertions about correlations
 Causal explanations must be distinguished from assertions about necessities
 Causal explanations have to be distinguished form story telling
Hume‘s perspective:
 When ever the assumed cause is observed the effect must be observed as well
 The cause must temporally precede the effect (this principle is employed in time series
analyses – Granger-Causality)
Mill‘s perspective:
 Cause must precede effect
 There must exist a relationship between cause and effect (causal mechanism)
 Rival causes must be eliminated (underdetemination)
These conditions lead to:
a) Method of concordance: if cause then effect
b) Method of distinction: if no cause then no effect
c) Method of simultaneous variation: if a) and b) are simultaneously fulfilled the
explanation gets stronger because rival explanations can be eliminated more easily
Coleman’s Bathtub, Friedman and Falsification
 Coleman, James S., 1990: Foundations of social theory. Cambridge, MA.
 Colman‘s bathtub relates the micro- and macro- level of causal explanation, thus it
relates structural and individual levels of explanation, example: conflict probability in
the international system.
Macrolevel
Microlevel
Variables that
influence Individuals
Outcome:
Social Phenomenon
influence choice
aggregation
expectations
Utility Functions
Aspirations
Social Interaction
Likelihood of conflict in the international system
(1)
Polarity of the
international system
(2)
governments
likelihood
of conflict
(4)
(3)
behaviour of
governments
1) Systemic relationship, structural hypothesis
2) contextual hypothesis
3) actors hypothesis
4) Aggregation hypothesis
Milton Friedman:
Useful theories can be built on wrong assumptions.
In principle, one can test all levels of theories:
-
the environment of individual choice can be misrepresented
the individual’s utility function can be wrong
assumption on the set of relevant actors and/or their behavioral repertoire can be
wrong
aggregation can be wrong
However: a theory provides insights into (at least one) relevant causal mechanism.
This insight can be useful AND make correct predictions even if the assumptions
are wrong.
Moreover: theories need to simplify, therefore: assumptions need to simplify as
well.
Falsification versus Verification
Popper
It is easy to obtain confirmations, if we look for them.
Confirmations should count only if they are the result of risky predictions.
Every good scientific theory is a prohibition.
(TP: it makes negative predictions. Example: event a will not happen)
A theory which is not refutable is not scientific.
(TP: example: Event a is an act of god. Event a happened because it was in the interest
of agent b. Event a happened because the country was of type c.)
A genuine test of a theory is an attempt to falsify it.
What does count as falsification or verification?
Unfortunately, only a negligible small share of social science theories are deterministic,
most of them are probabilistic.
Deterministic theories:
If a, then always b, because …
probabilistic theories:
a increases the probability of b, because …
Deterministic theories can be falsified by one deviant case.
Probabilistic cannot be falsified by one deviant case.
What to do?
The Purpose of Research Designs
A good research design:
 provides the toughest test for the theory,
 aims at maximizing the difference between prior and posterior
 makes valid inferences (avoids errors of type I and type II)
 tests the theory against a non-trivial nil hypothesis
 uses all available information efficiently