Suppose that the state of Texas is considering imposing water use restrictions.

Question

Suppose that the state of Texas is considering imposing water use restrictions. However, they wish to use a randomized experiment to test the effects of water use restrictions prior to implementing them statewide. Suppose that there 500 towns in Texas and that the state wishes to do an experiment in which 100 towns are selected for treatment. List the steps that the experiment should follow in order to ensure that the correct causal estimates are found using this experiment. Be specific. Explain how using a randomized experiment eliminates the potential for omitted variable bias. Use your own words. Is it possible to test if the treatment and control towns are balanced on unobservable? Explain.

Explanation / Answer

A) The experiment should follow the below steps in order to ensure that the correct causal estimates are found after this experiment:

1. Make Obejective Observations - The observations shoud be capable of verifications by others. This should be the first step for a experiment.

2. Make a Perdiction - We need to analyse the past and persent data to make the perdicitons and to come on a decision.

3. Perform an Experiment - Based on our observation and perdicitons we can design a experiment.

4. Analyse the Result - After perfoming the experiment we need to analyse the outcome that can be agrre or disagree with our prediction. If this disagree we can reject the experiment and if this agree we can accept the experiment.

5. Draw a Conclusion and Prepare your Report - This is the final step of our experiment where we need to draw the final conclusion and based on that conclusion we can make the final report with the results.

b) Randomized experiment surely eliminates the potential for omitted variable biasness. This way we can find the most accurate analysis. Randomized experiment contains the heterogenious sample which have all type of characterstics and which lead to the accurate results. Experimenter can bias while choosing the sample of his own choice but if we have the random sample in place this situation is being avoided and we have all type of sample from the population.

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