Decoupling synthetic control methods to ensure stability, accuracy and meaningfulness

Abstract

The synthetic control method (SCM) is widely used to evaluate causal effects under quasi-experimental designs. However, SCM suffers from weaknesses that compromise its accuracy, stability and meaningfulness, due to the nested optimization problem of covariate relevance and counterfactual weights. We propose a decoupling of both problems. We evaluate the economic effect of government formation deadlock in Spain-2016 and find that SCM method overestimates the effect by 0.23 pp. Furthermore, we replicate two studies and compare results from standard and decoupled SCM. Decoupled SCM offers higher accuracy and stability, while ensuring the economic meaningfulness of covariates used in building the counterfactual.