Indian School of Business

Causal inference and scientific

research
A two-term FPM course
Professors P Bhimasankaram and Sanjay Kallapur

In this course we introduce students to the concepts and techniques used in modern causal
research methods. We cover the counterfactual model, matching, propensity scores,
regression, instrumental variable methods, panel data, regression discontinuity, and
difference in differences. In addition, we also cover graphical causal models which
originated in computer science and have found adherents among researchers in
epidemiology, sociology, and political science. We find that graphical models help think
through the identification issues in econometrics. Finally, we show the application of these
and other techniques in actual research contexts. In other words, we cover these
techniques as integral parts of research design. The last few sessions of the course are
devoted to sensitivity analysis, i.e., qualitative and quantitative techniques to assess the
potential limitations of the chosen research design.

It is expected that students will have had basic exposure to the techniques mentioned
above, even if they are not familiar with all the intricacies. By the end of the course,
students are expected to be proficient in (a) choosing the right tool for their research, and
(b) implementing them appropriately.

The course will be conducted through lectures, workshops, and discussion.

Course material
We will extensively use two books:

Angrist, Joshua D., and Jorn-Steffen Pischke. ​Mostly Harmless Econometrics: An

​ Empiricist’s Companion. Princeton University Press, 2008. (AP)

Morgan, S. L., and C. Winship. ​Counterfactuals and Causal Inference: Methods and
​ Principles for Social Research. Cambridge University Press, 2007. (MW)

Several copies of each of the above books will be available in LRC for students to refer to.

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Other material that we will refer to include:

​
Rosenbaum, Paul R. ​Design of Observational Studies. New York: Springer, 2010.

​ xperimental and
Shadish, William R., Thomas D. Cook, and Donald T. Campbell. E
​
Quasi-Experimental Designs for Generalized Causal Inference. 2nd ed. Wadsworth
Publishing, 2001.

We will also provide our notes and ppts.

Requirements

Project (50% weight)

In groups of two, students will choose a broad research question in their area, one that has
been extensively researched but where closure is not achieved, and write a review of the
different methods that have been used to address the issue. Students will identify the
shortcomings of the research designs if any, and potential opportunities in terms of
research designs that could be used but have not, and propose studies that could be done
using those designs. Ideally these projects should be publishable in the J​ ournal of
Economic Literature or equivalent outlets in the respective fields.

Homework (20%)

Final Exam (30%)

Session-wise list of topics

1 Introduction (SK)

Materials
Kallapur and Pochiraju Ch 1

Topics
Observation v experimentation, prediction v explanation
Structural equation v reduced form

2
Counterfactual approach
Causal diagrams and 3 methods of identification

2 Counterfactual Model (PB)

Materials
Kallapur and Pochiraju Ch2

Topics
Potential outcome notation
Naive estimate and its bias
Conditional independence assumption (ignorable treatment assignment)
SUTVA

3 Randomized experiments (PB)

Material
Angrist and Pischke Ch 2, Rosenbaum Ch 2

Topics
How satisfies ignorability/CIA
Derivation of test statistics
Additive, Multiplicative, Tobit effects

4 Causal diagrams (SK)

Material (for sessions 4 and 5)

Kallapur and Pochiraju Ch 3
Elwert, Felix, and Christopher Winship. “Endogenous Selection Bias” (2011).
http://ipl.econ.duke.edu/seminars/system/files/seminars/138.pdf.

Topics
Basics
D-separation
Effects of conditioning
Application: which variables should be controlled for, and which ones should not
Generic methods of identification

3
Selection as conditioning on colliders

5 Causal diagrams, continued (SK)

Topics
The finer points in using graphical causal models
Case study

6 The three error types in scientific inference (SK)

Materials
Kallapur and Pochiraju Ch 4

Topics
Why p-values don't mean what we think they do
Heuristics in scientific research
The role of constructs
Galileo and the beginnings of modern science

Topics

7 Research design strategies (SK)

Materials
Kallapur and Pochiraju Ch 5, Rosenbaum Ch 3, 4, 5

Topics
Balancing for observables and dealing with unobservables
Opportunity as an arbitrary disruption to equilibrium: need to think about source of variation
in the X variable
Natural experiments
Proxy control and control outcomes

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8 Matching (PB)

Materials
MW Ch 4
Cram, D. P., V. Karan, and I. Stuart. “Three Threats to Validity of Choice-Based and
​ ontemporary Accounting
Matched-Sample Studies in Accounting Research*.” C
Research 26, no. 2 (2009): 477–516.

Topics
Mechanics of matching and estimation
Region of support

9 Matching 2 (PB)

Topics
Propensity score matching

10 Regression (SK)

Materials
Kallapur and Pochiraju Ch 6, MW Ch 5, AP Ch 3

Topics
Justification of linear regression
Regression as a type of matching
Omitted variable bias formula
What to control and what not to
Should you include a proxy
Robust standard errors
Generalized linear models -- Tobit, Probit/Logit

11 Instrumental variables (PB)

Materials
MW Ch 7

5
AP Ch 4

Topics
Mechanics of estimation
Heterogeneous outcomes -- LATE

12 IV - 2 and Regression discontinuity (PB)

Materials
Same as above +
Imbens, Guido W., and Thomas Lemieux. “Regression Discontinuity Designs: A Guide to
Practice.” ​Journal of Econometrics 142, no. 2 (February 2008): 615–635.
doi:10.1016/j.jeconom.2007.05.001.

Topics
Continuation of IV mechanics
Regression Discontinuity has to be haphazard

13 IV - 3 (SK)

Materials
Rosenzweig, Mark R., and Kenneth I. Wolpin. “Natural‘ Natural Experiments’ in
Economics.” ​Journal of Economic Literature 38, no. 4 (2000): 827–874.
Larcker, David F., and Tjomme O. Rusticus. “On the Use of Instrumental Variables in
Accounting Research.” ​Journal of Accounting and Economics 49, no. 3 (April 2010):
186–205. doi:10.1016/j.jacceco.2009.11.004.
Li, Kai, and Nagpurnanand Prabhala. “Self-Selection Models in Corporate Finance.” in
Espen Eckbo, ed. ​The Handbook of Corporate Finance: Empirical Corporate Finance.
Handbooks in Finance (2007).
http://papers.ssrn.com/sol3/papers.cfm?abstract_id=843105.

Topics
Pitfalls in interpretation of IV
Statistical pitfalls
Identification through parametric assumptions: Heckman’s method

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14 Panel data 1 (PB)

Materials
MW Ch 9
AP Ch 5

Topics
Fixed effects and first differences
What does and does it not control
Difference in differences
Fixed effects v first difference v lagged dependent variable

15 Panel data 2 - Estimation of std error (PB)

Materials
Petersen, M. A. “Estimating Standard Errors in Finance Panel Data Sets: Comparing
Approaches.” ​Review of Financial Studies 22, no. 1 (2009): 435–480.
Thompson, Samuel B. “Simple Formulas for Standard Errors That Cluster by Both Firm and
Time.” ​Journal of Financial Economics 99, no. 1 (January 2011): 1–10.
doi:10.1016/j.jfineco.2010.08.016.
Gow, Ian D., Gaizka Ormazabal, and Daniel J. Taylor. “Correcting for Cross-Sectional and
​ he Accounting Review 85, no. 2
Time-Series Dependence in Accounting Research.” T
(2010): 483. doi:10.2308/accr.2010.85.2.483.
Bertrand, Marianne, Esther Duflo, and Sendhil Mullainathan. “How Much Should We Trust
​ he Quarterly Journal of Economics 119, no.
Differences-In-Differences Estimates?” T
1 (February 1, 2004): 249–275. doi:10.1162/003355304772839588.

Topics
Clustered t stats
Pitfalls of serial correlation in DiD

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16 Panel data 3 (PB)

Materials

Topics

17 Sensitivity analysis 1 (SK)

Materials
Kallapur and Pochiraju Ch 9, Rosenbaum Ch 14, 15
Armstrong, Christopher S., Alan D. Jagolinzer, and David F. Larcker. “Chief Executive
Officer Equity Incentives and Accounting Irregularities.” ​Journal of Accounting
Research 48, no. 2 (2010): 225–271. doi:10.1111/j.1475-679X.2009.00361.x.
Core, John E. “Discussion of Chief Executive Officer Equity Incentives and Accounting
Irregularities.” ​Journal of Accounting Research 48, no. 2 (2010): 273–287.
doi:10.1111/j.1475-679X.2010.00367.x.

Topics
Power and sensitivity
Calculating sensitivity

18 Sensitivity analysis 2 (SK)

Materials
Rosenbaum Ch 17

Topics
Using design sensitivity to think of research design

19 Summary and conclusion (SK)

20 Student presentations