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A General Weighted Average Representation of the Ordinary and Two-Stage Least Squares Estimands

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  • Tymon Sloczynski

    () (Brandeis University and IZA)

Abstract

It is standard practice in applied work to study the effect of a binary variable ("treatment") on an outcome of interest using linear models with additive effects. In this paper I study the interpretation of the ordinary and two-stage least squares estimands in such models when treatment effects are in fact heterogeneous. I show that in both cases the coefficient on treatment is identical to a convex combination of two other parameters (different for OLS and 2SLS), which can be interpreted as the average treatment effects on the treated and controls under additional assumptions. Importantly, the OLS and 2SLS weights on these parameters are inversely related to the proportion of each group. The more units get treatment, the less weight is placed on the effect on the treated. What follows, the reliance on these implicit weights can have serious consequences for applied work. I illustrate some of these issues in four empirical applications from different fields of economics. I also develop a weighted least squares correction and simple diagnostic tools that applied researchers can use to avoid potential biases. In an important special case, my diagnostics only require the knowledge of the proportion of treated units.

Suggested Citation

  • Tymon Sloczynski, 2018. "A General Weighted Average Representation of the Ordinary and Two-Stage Least Squares Estimands," Working Papers 125, Brandeis University, Department of Economics and International Businesss School.
  • Handle: RePEc:brd:wpaper:125
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    References listed on IDEAS

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    Cited by:

    1. Strobl, Renate & Wunsch, Conny, 2018. "Identification of causal mechanisms based on between-subject double randomization designs," CEPR Discussion Papers 13028, C.E.P.R. Discussion Papers.
    2. Strobl, Renate & Wunsch, Conny, 2017. "Does Voluntary Risk Taking Affect Solidarity? Experimental Evidence from Kenya," Working papers 2017/12, Faculty of Business and Economics - University of Basel.
    3. Renate Strobl & Conny Wunsch, 2017. "Does Voluntary Risk Taking Affect Solidarity? Experimental Evidence from Kenya," CESifo Working Paper Series 6578, CESifo Group Munich.
    4. Bryan S. Graham & Cristine Campos de Xavier Pinto, 2018. "Semiparametrically efficient estimation of the average linear regression function," Papers 1810.12511, arXiv.org.
    5. Strobl, Renate & Wunsch, Conny, 2018. "Identification of causal mechanisms based on between-subject double randomization designs," CEPR Discussion Papers 13028, C.E.P.R. Discussion Papers.

    More about this item

    Keywords

    empirical heterogeneity; ordinary least squares; propensity score; two-stage least squares; treatment effects;

    JEL classification:

    • C21 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models
    • C24 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Truncated and Censored Models; Switching Regression Models; Threshold Regression Models
    • C26 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Instrumental Variables (IV) Estimation
    • C31 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Cross-Sectional Models; Spatial Models; Treatment Effect Models; Quantile Regressions; Social Interaction Models

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