The Fragility of Sparsity

We show, using three empirical applications, that linear regression estimates which rely on the assumption of sparsity are fragile in two ways. First, we document that different choices of the regressor matrix that do not impact ordinary least squares (OLS) estimates, such as the choice of baseline category with categorical controls, can move sparsity-based estimates by two standard errors or more. Second, we develop two tests of the sparsity assumption based on comparing sparsity-based estimators with OLS. The tests tend to reject the sparsity assumption in all three applications. Unless the number of regressors is comparable to or exceeds the sample size, OLS yields more robust inference at little efficiency cost.