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Clustering, Spatial Correlations and Randomization Inference

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  • Thomas Barrios
  • Rebecca Diamond
  • Guido W. Imbens
  • Michal Kolesar

Abstract

It is standard practice in empirical work to allow for clustering in the error covariance matrix if the explanatory variables of interest vary at a more aggregate level than the units of observation. Often, however, the structure of the error covariance matrix is more complex, with correlations varying in magnitude within clusters, and not vanishing between clusters. Here we explore the implications of such correlations for the actual and estimated precision of least squares estimators. We show that with equal sized clusters, if the covariate of interest is randomly assigned at the cluster level, only accounting for non-zero covariances at the cluster level, and ignoring correlations between clusters, leads to valid standard errors and confidence intervals. However, in many cases this may not suffice. For example, state policies exhibit substantial spatial correlations. As a result, ignoring spatial correlations in outcomes beyond that accounted for by the clustering at the state level, may well bias standard errors. We illustrate our findings using the 5% public use census data. Based on these results we recommend researchers assess the extent of spatial correlations in explanatory variables beyond state level clustering, and if such correlations are present, take into account spatial correlations beyond the clustering correlations typically accounted for.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 15760.

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Date of creation: Feb 2010
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Publication status: published as Thomas Barrios & Rebecca Diamond & Guido W. Imbens & Michal Koles�r, 2012. "Clustering, Spatial Correlations, and Randomization Inference," Journal of the American Statistical Association, Taylor & Francis Journals, vol. 107(498), pages 578-591, June.
Handle: RePEc:nbr:nberwo:15760

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Cited by:
  1. F. Coelli & P. Manasse, 2014. "The impact of floods on firms' performance," Working Papers wp946, Dipartimento Scienze Economiche, Universita' di Bologna.
  2. Hugh Gravelle & Rita Santos & Luigi Siciliani & Rosalind Goudie, 2012. "Hospital Quality Competition Under Fixed Prices," Working Papers 080cherp, Centre for Health Economics, University of York.
  3. Breinlich, Holger & Ottaviano, Gianmarco I.P. & Temple, Jonathan R.W., 2014. "Regional Growth and Regional Decline," Handbook of Economic Growth, in: Handbook of Economic Growth, edition 1, volume 2, chapter 4, pages 683-779 Elsevier.
  4. John Gibson & Bonggeun Kim & Susan Olivia, 2010. "Can We Trust Cluster-Corrected Standard Errors? An Application of Spatial Autocorrelation with Exact Locations Known," Working Papers in Economics 10/07, University of Waikato, Department of Economics.
  5. Brewer, Mike & Crossley, Thomas F. & Joyce, Robert, 2013. "Inference with Difference-in-Differences Revisited," IZA Discussion Papers 7742, Institute for the Study of Labor (IZA).

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