Decomposing the Composition Effect

Christoph Rothe

No 6397, IZA Discussion Papers from Institute of Labor Economics (IZA)

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.

Keywords: counterfactual distribution; decomposition methods (search for similar items in EconPapers)
JEL-codes: C13 C18 C21 J31 (search for similar items in EconPapers)
Pages: 31 pages
Date: 2012-02
New Economics Papers: this item is included in nep-ecm and nep-ltv
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

Published - published as 'Decomposing the Composition Effect: The Role of Covariates in Determining Between-Group Differences in Economic Outcomes' in: Journal of Business and Economic Statistics, 2015, 33 (3), 323-337

Downloads: (external link)
https://docs.iza.org/dp6397.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:iza:izadps:dp6397

Ordering information: This working paper can be ordered from
IZA, Margard Ody, P.O. Box 7240, D-53072 Bonn, Germany

Access Statistics for this paper

More papers in IZA Discussion Papers from Institute of Labor Economics (IZA) IZA, P.O. Box 7240, D-53072 Bonn, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Holger Hinte ().