By Daron Acemoglu
I discuss the role of economic theory in empirical work in development economics with special emphasis on general equilibrium and political economy considerations. I argue that economic theory plays (should play) a central role in formulating models, estimates of which can be used for counterfactual and policy analysis. I discuss why counterfactual analysis based on microdata that ignores general equilibrium and political economy issues may lead to misleading conclusions. I illustrate the main arguments using examples from recent work in development economics and political economy.
Having, modestly, tried myself to push the use of theory in development economics, especially where the quality of the data does not allow to draw good and/or generalizable empirical conclusions, I am happy to see this paper. There is only so much one can do with data without theory. Ultimately, policy prescriptions need to be based on some theory, and good theory is available.