Let's Call their Bluff: The Politics of Econometric Methodology

This short paper focuses on econometric issues raised by intentional government interventions aimed at influencing some politically sensitive outcomes. It first presents an example where multiple regression analysis provides quite a misleading diagnosis about foreign aid and immigration that can be rectified by using a causal analysis based on instrumental variables. It then offers a simple theoretical framework to bring out the basic information asymmetries affecting the game between the econometrician and the policy maker and their implications for the choice of instruments in a near-identification strategy. This approach is shown to provide a strong political judgement in the case of the armed violence between local governments and "Maoist" insurgents in eight states of India. Proper econometric analysis shows that the initiative of the insurgency cannot be blamed on the rebels.