ABSTRACT

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.

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