DP10253 Regional Policy Evaluation: Interactive Fixed Effects and Synthetic Controls

Author(s): Laurent Gobillon, Thierry Magnac
Publication Date: November 2014
Keyword(s): economic geography, enterprise zones, linear factor models, policy evaluation, synthetic controls
JEL(s): C21, C23, H53, J64, R11
Programme Areas: Public Economics, International Trade and Regional Economics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=10253

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 differences 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.