A Comparison between a Panel Data Regression Framework and the Synthetic Control Method

Abstract

Synthetic control method has been used in comparative case studies, in which the existence of a counter-factual unit with high level of similarities and comparability is crucial. On the other hand, many studies have been done and many methods have been offered in order to overcome the potential shortages of a traditional regression framework in such case studies. In this paper we compare the synthetic control method with a dynamic panel data regression framework. First, we show that the synthetic control method provides an unbiased estimator if the underlying model of the outcome variable of interest is a dynamic panel data model. Second, we compare the prediction power of these two methods. To apply the idea we use the recent sanctions on Iran as the suitable case of a policy intervention and a comparative case study.