Shift-Share Designs: Theory and Inference

Rodrigo Adão, Michal Kolesár, Eduardo Morales

NBER Working Paper No. 24944
Issued in August 2018
NBER Program(s):International Trade and Investment, Labor Studies

We study inference in shift-share regression designs, such as when a regional outcome is regressed on a weighted average of observed sectoral shocks, using regional sector shares as weights. We conduct a placebo exercise in which we estimate the effect of a shift-share regressor constructed with randomly generated sectoral shocks on actual labor market outcomes across U.S. Commuting Zones. Tests based on commonly used standard errors with 5% nominal significance level reject the null of no effect in up to 55% of the placebo samples. We use a stylized economic model to show that this overrejection problem arises because regression residuals are correlated across regions with similar sectoral shares, independently of their geographic location. We derive novel inference methods that are valid under arbitrary cross-regional correlation in the regression residuals. We show that our methods yield substantially wider confidence intervals in popular applications of shift-share regression designs.

Supplementary materials for this paper:

• supplemental appendix
• Code repository

Acknowledgments

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w24944

Published: Rodrigo Adão & Michal Kolesár & Eduardo Morales, 2019. "Shift-Share Designs: Theory and Inference*," The Quarterly Journal of Economics, vol 134(4), pages 1949-2010.