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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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Keywords: counterfactual distribution; decomposition methods;

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References

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  1. Melly, Blaise, 2005. "Decomposition of differences in distribution using quantile regression," Labour Economics, Elsevier, vol. 12(4), pages 577-590, August.
  2. Rothe, Christoph, 2010. "Identification of unconditional partial effects in nonseparable models," Economics Letters, Elsevier, vol. 109(3), pages 171-174, December.
  3. Roger Koenker & Kevin F. Hallock, 2001. "Quantile Regression," Journal of Economic Perspectives, American Economic Association, vol. 15(4), pages 143-156, Fall.
  4. 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.
  5. Victor Chernozhukov & Ivan Fernandez-Val & Blaise Melly, 2009. "Inference on counterfactual distributions," CeMMAP working papers CWP09/09, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
  6. Trivedi, Pravin K. & Zimmer, David M., 2007. "Copula Modeling: An Introduction for Practitioners," Foundations and Trends(R) in Econometrics, now publishers, vol. 1(1), pages 1-111, April.
  7. Christoph Rothe & Dominik Wied, 2013. "Misspecification Testing in a Class of Conditional Distributional Models," Journal of the American Statistical Association, Taylor & Francis Journals, vol. 108(501), pages 314-324, March.
  8. 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, vol. 67(4), pages 609-33, October.
  9. Fortin, Nicole & Lemieux, Thomas & Firpo, Sergio, 2011. "Decomposition Methods in Economics," Handbook of Labor Economics, Elsevier.
  10. repec:sae:ecolab:v:16:y:2006:i:2:p:1-2 is not listed on IDEAS
  11. Vaart,A. W. van der, 2000. "Asymptotic Statistics," Cambridge Books, Cambridge University Press, number 9780521784504.
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Cited by:
  1. 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) 907, Bank of Italy, Economic Research and International Relations Area.
  2. Roberto Pinheiro & Kurt Schmidheiny & Jan Eeckhout, 2011. "Spatial Sorting," 2011 Meeting Papers 488, Society for Economic Dynamics.
  3. Boris Kaiser, 2013. "Decomposing Differences in Arithmetic Means: A Doubly-Robust Estimation Approach," Diskussionsschriften dp1308, Universitaet Bern, Departement Volkswirtschaft.

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