Reduced-Form Versus Structural Modeling in Environmental and Resource Economics

Abstract

We contrast structural and reduced form empirical studies in environmental and resource economics. Both methodologies have their own context-specific advantages and disadvantages, and should be viewed as complements, not substitutes. Structural models typically require a theoretical model and explicit assumptions about structural errors in order to recover the parameters of behavioral functions. These estimates may be required to measure general equilibrium welfare effects or to simulate intricate feedback loops between natural and economic processes. However, many of the assumptions used to recover structural estimates are untestable. The goal of reduced form studies is, conversely, to recover key parameters of interest using exogenous within-sample variation with as few structural assumptions as possible — reducing reliance on these assumptions assists in establishing causality in the relationship of interest. Reduced-form studies do, however, require assumptions of their own, e.g., the (quasi) randomness of an experiment with no spillover effects on the control group.