Decomposing the composition effect


Rothe, Christoph



URL: https://ssrn.com/abstract=2019449
Document Type: Working paper
Year of publication: 2012
The title of a journal, publication series: IZA Discussion Paper Series
Volume: 6397
Place of publication: Bonn
Publication language: English
Institution: School of Law and Economics > Statistik (Rothe 2017-)
Subject: 330 Economics
Abstract: This paper proposes a decomposition of the composition effect, i.e. the part of the observed between-group difference in the distribution of some economic outcome that can be explained by differences in the distribution of covariates. Our decomposition contains three types of components: (i) the "direct contributions" of each covariate due to between-group differences in the respective marginal distributions, (ii) several “two way” and "higher order" interaction effects due to the interplay between two or more covariates' marginal distributions, and (iii) a "dependence effect" accounting for between-group differences in dependence patterns among the covariates. Our methods can be used to decompose differences in arbitrary distributional features, like quantiles or inequality measures, and allows for general nonlinear relationships between the outcome and the covariates. It can easily be implemented in practice using standard econometric techniques. An application to wage data from the US illustrates the empirical relevance of the decomposition’s components.

Dieser Datensatz wurde nicht während einer Tätigkeit an der Universität Mannheim veröffentlicht, dies ist eine Externe Publikation.




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