Bayesian Propensity Score-Augmented Latent Factor Models for Causal Inference with Time-Series Cross-Sectional Data

Abstract

We propose a Bayesian propensity score-augmented latent factor model for causal inference with time-series cross-sectional data. The framework explicitly models the treatment assignment mechanism by incorporating latent factor loadings, while the outcome model flexibly incorporates the propensity score, for example through stratification. Relative to existing approaches, the proposed method provides greater flexibility and captures additional heterogeneity across propensity-score strata, enabling more credible comparisons between treated and control units within each stratum. For estimation and inference, we adopt an approximate Bayesian procedure to address the model feedback problem common in Bayesian propensity score analysis. We demonstrate the performance of the proposed method through Monte Carlo simulations and an empirical application examining the effect of political connections on firm value.

Figures (9)

• Figure 1: Firm level Covariates and Propensity of Geithner Connection
• Figure 2: Dynamic Effect of Geithner Connection on Abnormal Return
• Figure 3: Estimated Dynamic Treatment Effects
• Figure 4: Estimated Propensity Scores with Factor Augmentation
• Figure 5: Distribution of Estimated Propensity Scores