Counterfactual Evidence Research Articles

The impact of the Trump presidency on the perception of corruption in the United States

ABSTRACT Using data from 2012 to 2023 and the synthetic control method, this study provides counterfactual evidence on how the Trump presidency had a significant and increasing impact on the perception of public sector corruption in the United States.

Does one size fit all in the Euro Area? Some counterfactual evidence

This paper examines whether Euro Area countries would have faced a more favorable inflation output variability tradeoff without the Euro. We provide evidence supporting this claim for the periods of the Great Recession and the Sovereign Debt Crisis. The deterioration of the tradeoff becomes insignificant only after Draghi’s ‘whatever it takes’ announcement. Results show that the detrimental effect of the Euro is more severe for peripheral countries. We base our results on a novel empirical strategy that, consistent with monetary theory, models the joint determination of the variability of inflation and output conditional on structural supply and demand shocks.

Gold market volatility and REITs' returns during tranquil and turbulent episodes

We analyze the predictability of REIT returns based on gold market volatility for 11 sectors and five regions. Our findings show higher gains during volatile gold market conditions, but results vary in tranquil and turbulent periods. We observe sector-specific investment behavior in the REITs market during the pre-GFC, but the post-GFC and COVID periods show otherwise. REITs offer a safe haven ability for gold, but their hedging power is sector-specific. For sensitivity analysis, stock market volatility is used in lieu of gold market volatility, and the outcome provides the expected counterfactual evidence with the REITs market. Our study has numerous policy implications for global financial market stakeholders.

Neurocomputational mechanisms of biased impression formation in lonely individuals

Social impressions are fundamental in our daily interactions with other people but forming accurate impressions of our social partners can be biased to different extents. Loneliness has previously been suggested to induce biases that hinder the formation of accurate impressions of others for successful social bonding. Here, we demonstrated that despite counterfactual evidence, negative first impressions bias information weighting, leading to less favorable trustworthiness beliefs. Lonely individuals did not only have more negative expectations of others’ social behavior, but they also manifested a stronger weighting bias. Reduced orbitofrontal cortex (OFC) activity was associated with a stronger weighting bias in lonelier individuals and mediated the relationship between loneliness and this weighting bias. Importantly, stronger coupling between OFC and temporoparietal junction compensated for such effects, promoting more positive trustworthiness beliefs especially in lonelier individuals. These findings bear potential for future basic and clinical investigations on social cognition and the development of clinical symptoms linked to loneliness.

Development Under Belt and Road Initiative: Gains for Tourism Industry in Participant Countries

ABSTRACT BRI is a mega-development project covering 140 countries in three continents; Asia, Africa, and Europe. The political and economic dimensions of BRI have been studied in several studies in the literature, but the effect on tourism has been less explored. Tourism development has been linked with sustainable development goals due to its substantial economic potential. A panel dataset of 151 countries from 2000–2019 is used to analyze the effect of participation in BRI on the tourism industry. The PSM-DID model is used after testing the validity through the event-study approach. The robustness of the estimates was tested through counterfactual evidence and a placebo test. The findings show that participation in BRI has increased the number of inbound tourists by 18.4% and tourism revenues by 7%. BRI proved relatively more beneficial for the tourism industry of South Asian, Western Asian, and Middle Eastern countries. The regional difference can be attributed to tourist attraction spots, entry regulations for foreigners, the service quality of the tourism industry, and support facilities offered to tourists. The cooperation among the countries should be increased to facilitate tourists. Tourism companies can use these findings to improve their selection of target markets and future development plans.

COVID-19 counterfactual evidence. Estimating the effects of school closures

ABSTRACT Scholars have started to estimate the effects of non-pharmaceutical interventions to reduce the health impact of COVID-19. However, the empirical evidence is highly contested, and since it is not known exactly what would have happened without those measures, political élites are left free to give credit to the voices that they prefer the most. We argue that any sensible assessment of the effectiveness of anti-COVID policies requires methodological reflection on what is actually comparable, and how to approximate the ideal “method of difference” theorized by John Stuart Mill. By evaluating the effectiveness of school closures as an anti-COVID policy, we provide two examples in which appropriate counterfactuals are inductively discovered rather than selected a priori. In the first one, we use Coarsened Exact Matching (CEM) in a cross-country setting, while in the second one, we implement the Synthetic Control Method in a within-country analysis. The article highlights the methodological advantages of including these techniques in the toolbox of policy scholars, while both examples confirm the effectiveness of school closures.

The Macroeconomic Influence of Recent Political Conflicts in Africa: Generalized Synthetic Counterfactual Evidence

This paper measures the macroeconomic influence of recent political crisis, protest and uprisings in Africa with the generalized synthetic control method and evaluates the role played by natural resource dependence on the modulation of the nexus. We find that political crisis, protests and uprisings have a significant and negative nexus with economic growth while the nexus is positive with investment and price level. For economic growth, the deviation of the actual series from the counterfactual is negative, instantaneous, persistent and highly significant; indicating non-negligible costs of the shock. Indeed, dependence on natural resources amplifies the negative influence of political crisis, protests and uprisings on GDP. Finally, the more the treated country depends on natural resources, the more it becomes resilient to the investment losses caused by political crisis.

Cultural Affinity, Regulation, and Market Structure: Evidence from the Canadian Retail Banking Industry

We estimate a perfect information static entry game to study the effect of cultural entry barriers on entry and competition in the retail banking industry. Canada provides a favorable setting for analysis due to its high linguistic diversity, concentrated market, and regulatory entry barriers. We find that cultural affinity between customers and financial institutions that share a common cultural origin plays an important role in explaining the comparative advantages of these institutions in certain markets. Using several counterfactual experiments and additional empirical evidence, we show that the effectiveness of regulations intended to foster competition is significantly limited by cultural barriers, which is a key determinant that shapes the competitive landscape of the industry. (JEL G21, G28, L13, Z13)

The Macroeconomic Impact of Recent Political Conflicts in Africa: Generalized Synthetic Counterfactual Evidence

This paper measures the macroeconomic impact of recent political crisis, protest and uprisings in Africa with the generalized synthetic control method and evaluates the role played by natural resource dependence on the modulation of the impact. We find that political crisis, protests and uprisings have a significant and negative impact on economic growth while the impact is positive on investment and price level. For economic growth, the deviation of the actual series from the counterfactual is negative, instantaneous, persistent and highly significant; indicating non-negligible costs of the shock. Indeed, dependence on natural resources amplifies the negative effect of political crisis, protests and uprisings on GDP. Finally, the more the treated country depends on natural resources, the more it becomes resilient from the investment losses caused by political crisis.

Should commodity tax rates be uniform across regions in a heterogeneous country? Evidence from India

With countries increasingly adopting the Goods and Services Tax (GST) as their system of commodity taxes replacing the myriad of sales, excise and other form of indirect taxes, there is a move towards the two features that characterize the GST: uniform tax rates across items and identical tax rates across regions. When India introduced the GST in 2017, it followed several other countries in departing from the first feature but in keeping with universal practice embraced the second feature. The chief motivation of this paper is to subject this latter feature to critical scrutiny. The study examines the four GST rates in India by comparing them with counterfactual evidence based on preference based optimal commodity tax rates estimated by taking into account regional diversity in prices and spending. The benchmarking suggests that the current top GST rates (12%, 16% and 28%) are much higher than can be justified by the optimal rates. The Indian evidence is also in favor of departing from the universal practice in GST of adopting a uniform tax across items. The paper makes a methodological contribution by proposing a procedure for calculating spatial prices that can be applied to a wide basket of items. The study provides evidence on the redistributive potential of indirect taxation by showing the progressive nature of the optimal commodity taxes. The latter result is of particular significance in developing countries where indirect taxes raise the greater share of revenue and provide an important policy tool for tackling increasing inequality. The study concludes with a list of policy lessons as the country seeks to make further changes to its GST. While there is a significant literature on harmonization of indirect taxes across countries that belong to a single economic grouping such as the EU, there is no such literature between regions within a large heterogeneous country. The present study on tax harmonization between the states in India attempts to fill this gap.

Co-integration and control: assessing the impact of events using time series data

Control groups can sometimes provide counterfactual evidence for assessing the impact of an event or policy change on a target variable. Fitting a time series model to target and control series offers potential gains over a direct comparison between the target and a weighted average of the controls. More importantly it highlights the assumptions underlying methods such as difference in differences and synthetic control and in doing so suggests ways in which these assumptions may be tested. Our focus is on time series models that are both simple and transparent. Potential gains from fitting such models are analysed and their relative performance is investigated using examples taken from the literature, including the effect of the California smoking law of 1988 and German re-unification. At the same time, some of the draw-backs to current methodology become apparent. It is argued that a time series strategy for the selection of a valid set of controls is to be preferred to one based on data-driven regression methods.

Cointegration and control: Assessing the impact of events using time series data

SummaryControl groups can provide counterfactual evidence for assessing the impact of an event or policy change on a target variable. We argue that fitting a multivariate time series model offers potential gains over a direct comparison between the target and a weighted average of controls. More importantly, it highlights the assumptions underlying methods such as difference in differences and synthetic control, suggesting ways to test these assumptions. Gains from simple and transparent time series models are analysed using examples from the literature, including the California smoking law of 1989 and German reunification. We argue that selecting controls using a time series strategy is preferable to existing data‐driven regression methods.

The Economic Cost of the Islamic Revolution and War for Iran: Synthetic Counterfactual Evidence

ABSTRACT This study estimates the joint effect of a new political regime and war against Iraq, on Iran’s per capita Gross Domestic Product (‘GDP,’ constant 2010 US$) for the period 1978–1988, during the revolution/war. I use a synthetic control approach, whereby a synthetic Iran is constructed as a weighted average of other Middle East and North Africa (‘MENA’)/Organization of the Petroleum Exporting (‘OPEC’) countries to match the average level of some key per capita GDP correlates over the period 1970–1977 as well as the evolution of the actual Iranian per capita GDP during that period. I find a sizable negative effect of the joint treatment. The average Iranian lost an accumulated sum of approximately US$ 34,660 during 1978–1988 (i.e. the average annual real per capita income loss of US$ 3,150). This loss equals 40% of the real income per capita, which an Iranian could earn in the absence of revolution and war. The confidence sets based on constant, linear, and uniform assumptions of treatment effect show that estimated income loss for Iran is sizeable and statistically significant. The results remain robust to a set of placebo tests.

The Impact of Religion on Economic Development

The role of religion in the development of law and order, in the progress of the government institutions and ultimately the state of economy has long occupied the minds of political economists. The obvious difficulty of this topic stems from the inability to stage and execute the controlled experiments, and the complexities of discovering the counterfactual evidence that would not be confounded by latent variables. In this paper we explore the novel approach to this problem that uses structural learning algorithms capable of finding the best-fit distributions for factors linking religion to major traits of the governance and economy. We find that the importance of religion in the society is conditionally independent from the economy given state institutions (rule of law and business regulations). This means a society with strong institutions can possibly develop a strong economy with no regard to religious beliefs.

International expansion for knowledge acquisition or knowledge acquisition for international expansion?

PurposeStarting from the knowledge-based view as a theoretical perspective, this study aims to examine how an emerging market multinational enterprise (EMMNE) engages in reverse knowledge transfer (RKT) processes and how such processes are managed by headquarters. Therefore, this paper captures the perspective of top management concerning RKT and the processes used to create, transfer and integrate knowledge.Design/methodology/approachThe study uses a longitudinal design based on the case method of investigation. The case selected for the study was a Brazilian company theoretically sampled for being a domestically, regionally and globally important, information-rich company that operates in an industry in which technology plays a crucial role. The company was also selected for having had asset-seeking motives in at least some of its foreign market entries and for having successfully absorbed foreign-acquired capabilities.FindingsThe study provides counterfactual evidence to the springboard perspective, considering timing and speed of the internationalization and catch-up processes and the size of acquisitions. The study also highlights differences to other emerging market multinational enterprises, concerning the internationalization trajectory and catch-up moves, and to traditional MNEs, regarding RKT challenges and practices.Research limitations/implicationsThe main limitations of the study relate to the case study method, which does not allow for statistical generalization, although it does support analytical generalization.Originality/valueThe study contributes to the literature by shedding light on the process by which a Latin American multinational firm developed technological capabilities to compete globally, focusing on the symbiotic, self-nurturing relationship between internationalization processes and technology acquisition and integration processes. Moreover, the work provides novel theoretical insights regarding timing, location, size and execution of the RKT activities. Finally, the paper contributes to the understanding of the relational aspects of the RKT process by focusing on building human relationships as the major force behind knowledge integration and examining the resistance of the acquired companies from developed markets to adopt the parent company’s best practices, or to contribute to its integrated knowledge, when the parent company is an EMMNE.

The Effectiveness of Public Subsidies for Private Innovations. An Experimental Approach

Abstract The effects of public subsidies in supporting innovative activity are subject to long-standing debates. Since empirical findings remain largely inconclusive, this study adds to this debate with counterfactual evidence from a laboratory experiment. In a creative real effort task simulating the innovation process, two distinct means of allocating subsidies are compared to a benchmark treatment without subsidies to identify their effects in fostering innovativeness. Furthermore, subjects’ cooperative behavior in relation to subsidies is investigated. Overall, subsidies lead to a substantial crowding-out of private investment. While the individual revenues increase due to the subsidy, the innovative activity fails to increase and less sophisticated innovations are realized. Consequently, subsidies have no or negative effects on overall welfare, depending on the subsidy specifics. However, subsidies do not influence cooperative behavior. These findings imply that the additional costs of subsidies for innovations might not be warranted by gains from additional innovations and increased welfare.

Evidence for Causal Mechanisms in Social Science: Recommendations from Woodward’s Manipulability Theory of Causation

In this article I analyze process tracing, a causal mechanism-based technique for testing causal claims in the social sciences that requires one to specify a chain of intervening causes between any putative cause and effect. I argue that one should not only give evidence that the intervening causes are present in a suitable case study, as process tracing methodologists recommend, but also provide counterfactual evidence to show that each link in the chain is genuinely causal. I detail what that counterfactual evidence should consist of, using Woodward’s manipulability theory, and argue that this evidence relies on tentative comparisons to other case studies.

The Effectiveness of Public Subsidies for Private Innovations. An Experimental Approach

The effects of public subsidies in supporting private innovative activity is subject to longstanding political and scientific debates. Since the empirical findings remain largely inconclusive, this study adds to this debate with counterfactual evidence from a laboratory experiment. In a creative real effort task simulating the innovation process, two distinct means of allocating subsidies are compared to a benchmark treatment without subsidies to identify their effects in fostering innovativeness. Furthermore, subjects’ cooperative behavior in relation to subsidies is investigated. Overall, subsidies lead to a substantial crowding-out of private investment. While the individual revenues increase due to the subsidy, the innovative activity fails to increase and less sophisticated innovations are realized. Consequently, subsidies have no positive and even negative effects on overall welfare, depending on the subsidy specifics. However, subsidies do not influence cooperative behavior. These findings imply that the additional costs of subsidies for innovations might not be warranted by gains from additional innovations and increased welfare.

A note on knowledge in the schooled society: towards an end to the crisis in curriculum theory

Michael Young’s recent paper in this journal is correct; there is a profound crisis in curriculum theory, and to be intellectually viable into the future the field must strive to bring back in empirical study of curriculum. Also by ignoring the empirical content of knowledge and access to it in mass education systems throughout the world, the field’s influential neo-Marxist paradigm unproductively avoids troubling, even theoretically damning, counterfactual evidence. The historical moment to address the crisis is propitious as the ‘schooled society’ is flourishing in unprecedented participation in formal education accompanied by a robust culture of education influencing fundamental processes that construct society worldwide. A brief review of sociological studies of historical and global change in curricular form and content illustrates the challenge before the field to end its own crisis. The results also indicate a profound challenge to the field’s reigning paradigm.

Building capacities of elected national representatives to interpret and to use evidence for health-related policy decisions: a case study from Botswana.

Elected national representatives make decisions to fund health programmes, but may lack skills to interpret evidence on health-related topics. In 2011, we surveyed the 61 members of Botswana's Parliament about their use of epidemiological evidence, then provided two half-days of training about using evidence. We included the importance of counter-factual evidence, the number needed to treat, and unit costs of interventions. A further session in 2012 covered evidence about the HIV epidemic in Botswana and planning the best mix of interventions to reduce new HIV infections. The 27 respondents reported they lacked good quality, timely evidence, and had difficulty interpreting and using evidence. Thirty-six, including seven ministers, attended one or both trainings. They participated actively and their evaluation was positive. Our experience in Botswana could potentially be extended to other countries in the region to support evidence-based efforts to tackle the HIV epidemic.