# Online Appendix Assessing the Incidence and Efficiency of a Prominent Place Based Policy

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1 Online Appendix Assessing the Incidence and Efficiency of a Prominent Place Based Policy By MATIAS BUSSO, JESSE GREGORY, AND PATRICK KLINE This document is a Supplemental Online Appendix of Assessing the Incidence and Efficiency of a Prominent Place Based Policy published in the American Economic Review Vol. XX No. YY. A. Model Extension with Two Types of Workers Let a fixed proportion π S of the agents be skilled and more productive than their unskilled counterparts who constitute the remaining fraction π U = π S of the population. Write the utility of individual i of skill group g {S, U} living in community j N and working in community k {, N } and sector s {, 2} as: u g i jks = w g jks r j κ jk + A j + ε g i jks = v g jks + εg i jks where w g jks is the wage a worker of skill group g from neighborhood j receives when { } working in sector s of neighborhood k. Define a set of indicator variables D g i jks equal { } to one if and only if max u g j k s i j k s = u g i jks for worker i and denote the measure of agents of skill group g in each residential/work location by N g jks = P ( D g i jks = { v g j k s }). Suppose that skilled and unskilled workers are perfect substitutes in production so that firm output may be written B k (q S ks + U ks ) f ( ) χ ks where the Sks and U ks refer to K total skilled and unskilled labor inputs respectively, χ ks = ks B k (q S ks +U ks is the capital to ) effective labor ratio, and q is the relative efficiency of skilled labor. Now wages will obey [ ( ) B k f χ ks χ ks f ( )] ( ) χ ks = w U jks τδ jks w S jks = qw U jks f ( ) χ ks = ρ Busso: Research Department, Inter-American Development Bank, 300 New York Ave. NW, Washington, DC ( Gregory: Department of Economics, University of Wisconsin-Madison, 80 Observatory Dr., Madison, WI , ( Kline: Department of Economics, UC Berkeley and NBER, 530 Evans Hall 3880, Berkeley, CA (

2 2 THE AMERICAN ECONOMIC REVIEW APRIL 203 where w U jks is the wage for unskilled workers and w S jks the wage for skilled workers. Note that d ln w U jks = d ln ws jks = d ln B k d ln B k so that productivity increases may still be detected by examining impacts on the wages of commuters. However, productivity effects may also shift the skill composition of local workers and commuters which could lead us to over or understate these effects. For this reason we adjust our wage impacts in the paper for observable skill characteristics. Our final modification is that with two skill groups, clearing in the housing market requires: H j = N g jks g s With these features in place the social welfare function may be written: W = g V g + j k r j H j H j 0 G j (x) dx It is straightforward then to verify that for some community m : d W d B = m τ=0 g j k s N g dw g jks jks d B m = [ π U N Ụ m + qπ S N.m] S R (ρ) d W d A = N m. m τ=0 where N.m g = N g jms and N m. = j s g k s deadweight losses attributable to taxes as: DW L τ = g 2 ψdτ 2 g N g jk wg jk j N k N 0 N g mks. Furthermore we may write the dτ N g jk wg jk j N k N t d ln N g jk dt dt where in the second line we have assumed a constant semi-elasticity of local employment ψ = d ln N g jk. This formula is effectively the same as that in equation (0) of the dτ paper, relying on the total covered wage bill and the elasticity ψ. Were the elasticity to vary by type we would simply need to compute the deadweight loss separately within skill group and average across groups using the marginal frequencies. Finally, we

3 VOL. 03 NO. 2 ONLINE APPENDIX 3 may write the deadweight attributable to the block grants as: [ dw DW L G C λ a dw d ln A λ b j N j τ=0 d ln B k N k [ = C λ a A j N j. λ b j N g j s k N τ=0 ] N g jks wg jks As before, the deadweight loss computation relies on the parameters λ a and λ b. Heterogeneity provides no essential complication to the exercise since, with knowledge of these parameters, one only needs to know the total wage bill and population inside of the zone to compute DW L G. ] B. Monte Carlo Experiments We simulated hierarchical datasets of 64 zones with a random number of tracts N z within each zone. The number of tracts per zone was generated according to N z = 0+ η z where η z is a Negative Binomial distributed random variable with the first two moments matching the ones observed in the data (i.e. a mean 2 and a standard deviation of 6 tracts). Hence, each simulated sample was expected to yield approximately,344 census tracts with no zone containing less than 0 tracts in any draw. Outcomes were generated according to the model: Y tz = β z T z + α x t X tz + α p z P z + ξ z + e tz where T z is an EZ assignment dummy, X tz is a tract level regressor, P z is a zone level regressor, ξ z a random zone effect, and e tz an idiosyncratic tract level error. We assume throughout that: X tz P z N (0, I 3 ) e tz To build in some correlation between the covariates and EZ designation, and to reflect the fact that treated zones tend to be larger, we model the EZ assignment mechanism as: () T z = I ( rank ( ) ) Tz 6 Tz = X z + P z N z + u z u z N (0, ) where X z = N z X tz t z and the rank (.) function ranks the T z in descending order. Note that this assignment process imposes that exactly six zones will be treated. Hence, each simulation sample will face the inference challenges present in our data.

4 4 THE AMERICAN ECONOMIC REVIEW APRIL 203 The nature of the coefficients ( β z, αt x, α z p ) and the random effect ξ z vary across our Monte Carlo designs as described in the following table. We have two sets of results. In the first set, which we label symmetric, ξ z follows a normal distribution. In a second set of results, which we label asymmetric, ξ z follows a χ 2 distribution. Table S: Data Generating Processes Symmetric Asymmetric ξ z N (0, ) ξ z χ 2 (4). Baseline β z = 0, αt x = αz p = β z = 0, αt x = αz p = 2. Random Coefficient on X tz 3. Random Coefficient on P z Same as ) but, αt x N (, ) Same as ) but, αz p N (, ) Same as ) but, (αt x +3) χ 2 (4) Same as ) but, (αz p +3) χ 2 (4) 4. Random Coefficient on T z Same as ) but, β z N (0, ) Same as ) but, (β z +4) χ 2 (4) 5. All deviations from baseline (2) + (3) + (4) (2) + (3) + (4) Note that the null of zero average treatment effect among the treated is satisfied in each simulation design. Specification ) corresponds to the relatively benign case where our regression model is properly specified and the errors are homoscedastic. Specification 2) allows for heteroscedasticity with respect to the tract level regressor, while specification 3) allows some heteroscedasticity in the zone level regressor. Specification 4) allows heteroscedasticity with respect to the treatment, or alternatively, a heterogeneous but mean zero treatment effect. Specification 5) combines all of these complications so that heteroscedasticity exists with respect to all of the regressors. For each Monte Carlo design we compute three sets of tests of the true null that EZ designation had no average effect on treated tracts. The first (analytical) uses our analytical cluster-robust standard error to construct a test statistic t = β where and rejects when t >.96. The second (wild bootstrap-se) uses a clustered wild bootstrap procedure to construct a bootstrap standard error σ and rejects when β σ >.96. The third approach (wild bootstrap-t) estimates the wild bootstrap distribution Ft (.) of the test statistic t = β σ and rejects when t > Ft (0.95) where Ft (0.95) denotes the 95th percentile of the bootstrap distribution of t statistics. Both the bootstrap-se and bootstrap-t procedures simulate the bootstrap distribution imposing the null that β = 0 as recommended by Cameron, Gelbach, and Miller (2008). The false rejection rates for these three tests in each of the five simulation designs are given in the table below. σ

5 VOL. 03 NO. 2 ONLINE APPENDIX 5 Table S2: False Rejection Rates in Monte Carlo Simulations Tract-level models Symmetric Analytical Analytical Wild Wild Wild Wild s.e. s.e. BS-s.e. BS-s.e. BS-t BS-t OLS PW OLS PW OLS PW Baseline Random Coefficient on X tz Random Coefficient on P z Random Coefficient on T z All Asymmetric Baseline Random Coefficient on X tz Random Coefficient on P z Random Coefficient on T z All Standard error based methods tend to overreject in both designs save for in the case of OLS where the wild bootstrapped standard errors perform well. However the wild bootstrapped-t procedure yields extremely accurate inferences for both the OLS and PW estimators across all designs.

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