Question

For each of the 3 causal questions (i, ii, and iii) answer the following (and label your answers clearly):

a. What is the outcome variable and what is the treatment?

b. Define the counterfactual outcomes Yi(0) and Yi(1)

c.What plausible causal channel(s) runs directly from the treatment to the outcome? In what direction would that push the results?

d.Is reverse causality a potential concern?

e.What are possible sources of selection and/or omitted variable bias in the raw comparison of outcomes and treatment status? Which way(s) would you expect the bias to go and why?

Questions

i.Many firms, particularly in poorer countries, are small and informal.Do informal firms grow more slowly than formal firms?

ii.Do students who come to class more get higher grades?

iii.Are countries whose governments are a larger part of the economy (ie G/GDP is larger) wealthier?

Answer 1

Question	Firms in poorer countries	Students more regular in class	Larger gov't, wealthier countries
Outcome variables; treatment variables	Outcome variable - Size of firms Treatment variable - Type of country: rich or poor	Outcome variable - Grades: high or low Treatment variable - students' attendance in class	Outcome variable - type of country: rich or poor Treatment variable - Govt. size (as a proportion of economy)
Counterfactual outcomes Yi(0) and Yi(1)	a) Rich countries have larger firms b) Poorer countries have smaller firms	a) Students who attend fewer classes get lower marks b) Students who attend more classes get higher marks	a) Countries with smaller governments are poorer b) Countries with larger governments are wealthier
Causal channel from treatment to outcome	Poorer countries aren't able to provide the infrastructure and support to enable firms to grow	Students who attend more classes understand the concepts better and write better answers	A bigger governement is able to spend money to create infrastructure to help the economy grow
Reverse causality?	Possible but not probable. It is important for firms in a country to get support before they can grow and contribute to economy.	Unlikely. Students who attend more classes would get higher grades but if someone gets higher grades without attending classes may not get the motivation to attend more classes	Likely. A government can grow only by taxing its people and if the economy is not wealthy already it is hard for it to support a big government
Biases in selecting and / or omitting variables	There are many other variables that are responsible for the size of firms in a country, e.g., the natural resource endowment, whether it is not a trade route, etc.	There are other variables, e.g., the number of years a student has studied prior to their current degree course, their inherent understanding of the subject (which could be related to the first one), etc.	A country's natural resource endowment, its level of technological advancement, and the skill level of the population are more important factor than the size of its government.