# Propensity-Score Methods vs. Regression

Propensity-score methods shift attention from the estimation of E[Yj|Xj, Dj] to the estimation of the propensity score, p(Xi) = E[Dj|Xj]. This is attractive in applications where the latter is easier to model or

motivate. For example, Ashenfelter (1978) showed that participants in government-funded training programs often have suffered a marked pre-program dip in earnings, a pattern found in many later studies. If this dip is the only thing that makes trainees special, then we can estimate the causal effect of training on earnings by controlling for past earnings dynamics. In practice, however, it’s hard to match on earnings dynamics since earnings histories are both continuous and multi-dimensional. Dehejia and Wahba (1999) argue in this context that the causal effects of training programs are better estimated by conditioning on the propensity score than by conditioning on the earnings histories themselves.

The propensity-score estimates reported by Dehejia and Wahba are remarkably close to the estimates from a randomized trial that constitute their benchmark. Nevertheless, we believe regression should be the starting point for most empirical projects. This is not a theorem; undoubtedly, there are circumstances where propensity score matching provides more reliable estimates of average causal effects. The first reason we don’t find ourselves on the propensity-score bandwagon is practical: there are many details to be filled in when implementing propensity-score matching – such as how to model the score and how to do inference – these details are not yet standardized. Different researchers might therefore reach very different conclusions, even when using the same data and covariates. Moreover, as we’ve seen with the Horvitz-Thompson estimands, there isn’t very much theoretical daylight between regression and propensity-score weighting. If the regression model for covariates is fairly flexible, say, close to saturated, regression can be seen as a type

of propensity-score weighting, so the difference is mostly in the implementation. In practice you may be far from saturation, but with the right covariates this shouldn’t matter.

The face-off between regression and propensity-score matching is illustrated here using the same National Supported Work (NSW) sample featured in Dehejia and Wahba (1999).[32] The NSW is a mid-1970s program that provided work experience to a sample with weak labor-force attachment. Somewhat unusually for it’s time, the NSW was evaluated in a randomized trial. Lalonde’s (1986) path-breaking analysis compared the results from the NSW randomized study to econometric results using non-experimental control groups drawn from the PSID and the CPS. He came away pessimistic because plausible non-experimental methods generated a wide range of results, many of which were far from the experimental estimates. Moreover, Lalonde argued, an objective investigator, not knowing the results of the randomized trial, would be unlikely to pick the best econometric specifications and observational control groups.

In a striking second take on the Lalonde (1986) findings, Dehejia and Wahba (1999) found that they could come close to the NSW experimental results by matching the NSW treatment group to observational control groups selected using the propensity score. They demonstrated this using various comparison groups. Following Dehejia and Wahba (1999), we look again at two of the CPS comparison groups, first, a largely unselected sample (CPS-1) and then a narrower comparison group selected from the recently unemployed (CPS-3).

Table 3.3.2 (a replication of Table 1 in Dehejia and Wahba, 1999) reports descriptive statistics for the NSW treatment group, the randomly selected NSW control group, and our two observational control groups. The NSW treatment group and the randomly selected NSW control groups are younger, less educated, more likely to be nonwhite, and have much lower earnings than the general population represented by the CPS-1 sample. The CPS-3 sample matches the NSW treatment group more closely but still shows some differences, particularly in terms of race and pre-program earnings.

Table 3.3.3 reports estimates of the NSW treatment effect. The dependent variable is annual earnings in 1978, a year or two after treatment. Rows of the table show results with alternative sets of controls: none; all the demographic variables in Table 3.3.2; lagged (1975) earnings; demographics plus lagged earnings; demographics and two lags of earnings. All estimates are from regressions of 1978 earnings on a treatment dummy plus controls (the raw treatment-control difference appears in the first row).

Estimates using the experimental control group, reported in column 1, are in the order of $1,600-1,800. Not surprisingly, these estimates vary little across specifications. In contrast, the raw earnings gap between NSW participants and the CPS-1 sample, reported in column 2, is roughly $-8,500, suggesting this comparison is heavily contaminated by selection bias. The addition of demographic controls and lagged earnings narrows the gap considerably; the estimated treatment effect reaches (positive) $800 in the last row. The results

are even better in column 3, which uses the narrower CPS-3 comparison group. The characteristics of this group are much closer to the those of NSW participants; consistent with this, the raw earnings difference is only $-635. The fully-controlled estimate, reported in the last row, is close to $1,400, not far from the experimental treatment effect.

A drawback of the process taking us from CPS-1 to CPS-3 is the ad hoc nature of the rules used to construct the smaller and more carefully-selected CPS-3 comparison group. The CPS-3 selection criteria can be motivated by the NSW program rules, which favor individuals with low earnings and weak labor-force attachment, but in practice, there are many ways to implement this. We’d therefore like a more systematic approach to pre-screening. In a recent paper, Crump, Hotz, Imbens and Mitnik (2006) suggest that the propensity score be used for systematic sample-selection as a precursor to regression estimation. This contrasts with our earlier discussion of the propensity score as the basis for an estimator.

We implemented the Crump, et al. (2006) suggestion by first estimating the propensity score on a

pooled NSW-treatment and observational-comparison sample, and then picking only those observations with 0.1 < p(Xj) < 0.9. In other words, the estimation sample is limited to observations with a predicted probability of treatment equal to at least 10 percent, but no more than 90 percent. This ensures that regressions are estimated with a sample including only covariate cells with there are at least a few treated and control observations. Estimation using screened samples therefore requires no extrapolation to cells without "common support", i. e. to cells where there is no overlap in the covariate distribution between treatment and controls. Descriptive statistics for samples screened on the score (estimated using the full set of covariates listed in the table) appear in the last two columns of Table 3.3.2. The covariate means in screened CPS-1 and CPS-3 are much closer to the NSW means in column 1 than are the covariate means from unscreened samples.

We explored the common-support screener further using alternative sets of covariates, but with the same covariates used for both screening and the estimation of treatment effects at each iteration. The resulting estimates are displayed in the final two columns of Table 3.3.3. Controlling for demographic variables or lagged earnings alone, these results differ little from those in columns 2-3. With both demographic variables and a single lag of earnings as controls, however, the screened CPS-1 estimates are quite a bit closer to the experimental estimates than are the unscreened results. Screened CPS-1 estimates with two lags of earnings remain close to the experimental benchmark. On the other hand, the common-support screener improves the CPS-3 results only slightly with a single lag of earnings and seems to be a step backward with two.

This investigation boosts our (already strong) faith in regression. Regression control for covariates does a good job of eliminating selection bias in the CPS-1 sample in spite of a huge baseline gap. Restricting the sample using our knowledge of program admissions criteria yields even better regression estimates with CPS-3, about as good as Dehejia and Wahba’s (1999) propensity score matching results with two lags of earnings. Systematic pre-screening to enforce common support seems like a useful adjunct to regression estimation with CPS-1, a large and coarsely-selected initial sample. The estimates in screened CPS-1 are as good as unscreened CPS-3. We note, however, that the standard errors for estimates using propensity- score-screened samples have not been adjusted to reflect sampling variance in our estimates of the score. An advantage of pre-screening using prior information, as in the step from CPS-1 to CPS-3, is that no such adjustment is necessary.

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