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Decomposing the Composition Effect

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  • Rothe, Christoph

    ()
    (Columbia University)

Abstract

This paper proposes a decomposition of the composition effect, i.e. the part of the observed between-group difference in the distribution of some economic outcome that can be explained by differences in the distribution of covariates. Our decomposition contains three types of components: (i) the "direct contributions" of each covariate due to between-group differences in the respective marginal distributions, (ii) several “two way” and "higher order" interaction effects due to the interplay between two or more covariates' marginal distributions, and (iii) a "dependence effect" accounting for between-group differences in dependence patterns among the covariates. Our methods can be used to decompose differences in arbitrary distributional features, like quantiles or inequality measures, and allows for general nonlinear relationships between the outcome and the covariates. It can easily be implemented in practice using standard econometric techniques. An application to wage data from the US illustrates the empirical relevance of the decomposition’s components.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 6397.

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Length: 31 pages
Date of creation: Feb 2012
Date of revision:
Handle: RePEc:iza:izadps:dp6397

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Related research

Keywords: counterfactual distribution; decomposition methods;

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References

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  1. Victor Chernozhukov & Iván Fernández-Val & Blaise Melly, 2012. "Inference on counterfactual distributions," CeMMAP working papers, Centre for Microdata Methods and Practice, Institute for Fiscal Studies CWP05/12, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
  2. Vaart,A. W. van der, 2000. "Asymptotic Statistics," Cambridge Books, Cambridge University Press, Cambridge University Press, number 9780521784504.
  3. Rothe, Christoph, 2010. "Identification of unconditional partial effects in nonseparable models," Economics Letters, Elsevier, Elsevier, vol. 109(3), pages 171-174, December.
  4. Rothe, Christoph & Wied, Dominik, 2012. "Misspecification Testing in a Class of Conditional Distributional Models," IZA Discussion Papers 6364, Institute for the Study of Labor (IZA).
  5. Joseph G. Altonji & Prashant Bharadwaj & Fabian Lange, 2008. "Changes in the Characteristics of American Youth: Implications for Adult Outcomes," NBER Working Papers 13883, National Bureau of Economic Research, Inc.
  6. Melly, Blaise, 2005. "Decomposition of differences in distribution using quantile regression," Labour Economics, Elsevier, Elsevier, vol. 12(4), pages 577-590, August.
  7. Fortin, Nicole & Lemieux, Thomas & Firpo, Sergio, 2011. "Decomposition Methods in Economics," Handbook of Labor Economics, Elsevier, Elsevier.
  8. Koenker,Roger, 2005. "Quantile Regression," Cambridge Books, Cambridge University Press, Cambridge University Press, number 9780521608275.
  9. Donald, Stephen G & Green, David A & Paarsch, Harry J, 2000. "Differences in Wage Distributions between Canada and the United States: An Application of a Flexible Estimator of Distribution Functions in the Presence of Covariates," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 67(4), pages 609-33, October.
  10. Trivedi, Pravin K. & Zimmer, David M., 2007. "Copula Modeling: An Introduction for Practitioners," Foundations and Trends(R) in Econometrics, now publishers, now publishers, vol. 1(1), pages 1-111, April.
  11. repec:sae:ecolab:v:16:y:2006:i:2:p:1-2 is not listed on IDEAS
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Cited by:
  1. Boris Kaiser, 2013. "Decomposing Differences in Arithmetic Means: A Doubly-Robust Estimation Approach," Diskussionsschriften, Universitaet Bern, Departement Volkswirtschaft dp1308, Universitaet Bern, Departement Volkswirtschaft.
  2. Roberto Pinheiro & Kurt Schmidheiny & Jan Eeckhout, 2011. "Spatial Sorting," 2011 Meeting Papers, Society for Economic Dynamics 488, Society for Economic Dynamics.
  3. Domenico Depalo & Raffaela Giordano & Evangelia Papapetrou, 2013. "Public-private wage differentials in euro area countries: evidence from quantile decomposition analysis," Temi di discussione (Economic working papers), Bank of Italy, Economic Research and International Relations Area 907, Bank of Italy, Economic Research and International Relations Area.

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