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.