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The Augmented Synthetic Control Method

Author

Listed:
  • Eli Ben-Michael
  • Avi Feller
  • Jesse Rothstein

Abstract

The synthetic control method (SCM) is a popular approach for estimating the impact of a treatment on a single unit in panel data settings. The "synthetic control" is a weighted average of control units that balances the treated unit's pre-treatment outcomes as closely as possible. A critical feature of the original proposal is to use SCM only when the fit on pre-treatment outcomes is excellent. We propose Augmented SCM to extend SCM to settings where such pre-treatment fit is infeasible. Analogous to bias correction for inexact matching, Augmented SCM uses an outcome model to estimate the bias due to imperfect pre-treatment fit and then de-biases the original SCM estimate. Our main proposal, which uses ridge regression as the outcome model, directly controls pre-treatment fit while minimizing extrapolation from the convex hull. We bound the bias of this approach under a linear factor model and show how regularization helps to avoid over-fitting to noise. We demonstrate gains from Augmented SCM with extensive simulation studies and apply this framework to estimate the impact of the 2012 Kansas tax cuts on economic growth. We implement the proposed method in the new augsynth R package.

Suggested Citation

  • Eli Ben-Michael & Avi Feller & Jesse Rothstein, 2018. "The Augmented Synthetic Control Method," Papers 1811.04170, arXiv.org, revised Nov 2019.
  • Handle: RePEc:arx:papers:1811.04170
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    File URL: http://arxiv.org/pdf/1811.04170
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    References listed on IDEAS

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    Cited by:

    1. Davide Viviano & Jelena Bradic, 2019. "Synthetic learner: model-free inference on treatments over time," Papers 1904.01490, arXiv.org.

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