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The Taylor Decomposition: A Unified Generalization of the Oaxaca Method to Nonlinear Models

Author

Listed:
  • Stephen Bazen

    () (AMSE Aix-Marseille School of Economics), CNRS and EHESS)

  • Xavier Joutard

    () (AMSE (Aix-Marseille School of Economics), CNRS and EHESS)

Abstract

The widely used Oaxaca decomposition applies to linear models. Extending it to commonly used nonlinear models such as binary choice and duration models is not straightforward. This paper shows that the original decomposition using a linear model can be obtained as a first order Taylor expansion. This basis provides a means of obtaining a coherent and unified approach which applies to nonlinear models, which we refer to as a Taylor decomposition. Explicit formulae are provided for the Taylor decomposition for the main nonlinear models used in applied econometrics including the Probit binary choice and Weibull duration models. The detailed decomposition of the explained component is expressed in terms of what are usually referred to as marginal effects and a remainder. Given Jensen's inequality, the latter will always be present in nonlinear models unless an ad hoc or tautological basis for decomposition is used.

Suggested Citation

  • Stephen Bazen & Xavier Joutard, 2013. "The Taylor Decomposition: A Unified Generalization of the Oaxaca Method to Nonlinear Models," AMSE Working Papers 1332, Aix-Marseille School of Economics, Marseille, France, revised May 2013.
  • Handle: RePEc:aim:wpaimx:1332
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    Cited by:

    1. Laetitia Duval & François-Charles Wolff, 2016. "“I even met happy gypsies”," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 24(4), pages 727-764, October.
    2. Boutin, Delphine, 2016. "Migration Experience and Access to a First Job in Uganda," IZA Discussion Papers 10119, Institute for the Study of Labor (IZA).

    More about this item

    Keywords

    Oaxaca decomposotion; nonlinear models;

    JEL classification:

    • C20 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - General

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