Regional Policy Evaluation: Interactive Fixed Effects and Synthetic Controls

Posted: 20 Jul 2013

See all articles by Laurent Gobillon

Laurent Gobillon

National Institute of Statistics and Economic Studies (INSEE) - Center for Research in Economics and Statistics (CREST); National Institute of Demographic Studies (INED)

Thierry Magnac

Toulouse School of Economics; University of Toulouse 1 - Industrial Economic Institute (IDEI); IZA Institute of Labor Economics; Centre for Economic Policy Research (CEPR)

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Abstract

In this paper, we investigate the use of interactive effect or linear factor models in regional policy evaluation. We contrast treatment effect estimates obtained by Bai (2009)'s least squares method with the popular difference in difference estimates as well as with estimates obtained using synthetic control approaches as developed by Abadie and coauthors. We show that difference in differences are generically biased and we derive the support conditions that are required for the application of synthetic controls. We construct an extensive set of Monte Carlo experiments to compare the performance of these estimation methods in small samples. As an empirical illustration, we also apply them to the evaluation of the impact on local unemployment of an enterprise zone policy implemented in France in the 1990s.

Keywords: policy evaluation, linear factor models, synthetic controls, economic geography, enterprise zones

JEL Classification: C21, C23, H53, J64, R11

Suggested Citation

Gobillon, Laurent and Magnac, Thierry, Regional Policy Evaluation: Interactive Fixed Effects and Synthetic Controls. IZA Discussion Paper No. 7493, Available at SSRN: https://ssrn.com/abstract=2296300

Laurent Gobillon (Contact Author)

National Institute of Statistics and Economic Studies (INSEE) - Center for Research in Economics and Statistics (CREST) ( email )

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France

National Institute of Demographic Studies (INED) ( email )

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HOME PAGE: http://laurent.gobillon.free.fr/

Thierry Magnac

Toulouse School of Economics ( email )

Manufacture des Tabacs
21 Allees de Brienne
Toulouse, 31000
France

University of Toulouse 1 - Industrial Economic Institute (IDEI) ( email )

Manufacture des Tabacs
21 Allee de Brienne bat. F
Toulouse Cedex, F-31000
France

IZA Institute of Labor Economics ( email )

P.O. Box 7240
Bonn, D-53072
Germany

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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