Regional Policy Evaluation: Interactive Fixed Effects and Synthetic Controls

In this paper, we investigate the use of interactive effect or linear factor models in regional policy evaluation. We contrast treatment effect estimates obtained using Bai (2009) with those obtained using difference in differences and synthetic controls (Abadie and coauthors). We show that difference in differences are generically biased, and we derive support conditions for synthetic controls. We construct Monte Carlo experiments to compare these estimation methods in small samples. As an empirical illustration, we provide an evaluation of the impact on local unemployment of an enterprise zone policy implemented in France in the 1990s.