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Synthetic Decomposition for Counterfactual Predictions

Nathan Canen and Kyungchul Song
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Kyungchul Song: University of British Columbia

The Warwick Economics Research Paper Series (TWERPS) from University of Warwick, Department of Economics

Abstract: Counterfactual predictions are challenging when the policy variable goes beyond its pre-policy support. However, in many cases, information about the policy of interest is available from different (“source”) regions where a similar policy has already been implemented. In this paper, we propose a novel method of using such data from source regions to predict a new policy in a target region. Instead of relying on extrapolation of a structural relationship using a parametric specification, we formulate a transferability condition and construct a synthetic outcome-policy relationship such that it is as close as possible to meeting the condition. The synthetic relationship weighs both the similarity in distributions of observables and in structural relationships. We develop a general procedure to construct asymptotic confidence intervals for counterfactual predictions and prove its asymptotic validity. We then apply our proposal to predict average teenage employment in Texas following a counterfactual increase in the minimum wage.

Keywords: Counterfactual Predictions; Decomposition Analysis; Ex Ante Policy Evaluation; Synthetic Decomposition; Uniform Asymptotic Validity JEL codes: C30; C54 (search for similar items in EconPapers)
Date: 2023
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Citations: View citations in EconPapers (1)

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