Estimating the Variance of Decomposition Effects

Takuya Hasebe

No 6, Working Papers from City University of New York Graduate Center, Ph.D. Program in Economics

Abstract: We derive the asymptotic variance of the Blinder-Oaxaca decomposition effects. We show that the delta method approach that builds on the assumption of fixed regressors understates true variability of the decomposition effects when regressors are stochastic. Our proposed variance estimator takes randomness of regressors into consideration. Our approach is applicable to both the linear and nonlinear decompositions, for the latter of which only a bootstrap method is an option. As our derivation follows the general framework of m-estimation, it is straightforward to extend to the cluster-robust variance estimator. We demonstrate the finite-sample performance of our variance estimator with a Monte Carlo study and present a real-data application.

Keywords: Decomposition Analysis; Asymptotic Variance; m-estimation (search for similar items in EconPapers)
JEL-codes: C10 J70 (search for similar items in EconPapers)
Pages: 28
Date: 2015-04-15
New Economics Papers: this item is included in nep-ecm and nep-ore
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Journal Article: Estimating the variance of decomposition effects (2016)
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