NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
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When Should You Adjust Standard Errors for Clustering?

Alberto Abadie, Susan Athey, Guido W. Imbens, Jeffrey Wooldridge

NBER Working Paper No. 24003
Issued in November 2017
NBER Program(s):The Program on Aging, The Corporate Finance Program, The Program on Children, The Development Economics Program, The Education Program, The Environment and Energy Program, The Health Care Program, The Health Economics Program, The Law and Economics Program, The Labor Studies Program, The Public Economics Program, The Political Economy Program

In empirical work in economics it is common to report standard errors that account for clustering of units. Typically, the motivation given for the clustering adjustments is that unobserved components in outcomes for units within clusters are correlated. However, because correlation may occur across more than one dimension, this motivation makes it difficult to justify why researchers use clustering in some dimensions, such as geographic, but not others, such as age cohorts or gender. This motivation also makes it difficult to explain why one should not cluster with data from a randomized experiment. In this paper, we argue that clustering is in essence a design problem, either a sampling design or an experimental design issue. It is a sampling design issue if sampling follows a two stage process where in the first stage, a subset of clusters were sampled randomly from a population of clusters, and in the second stage, units were sampled randomly from the sampled clusters. In this case the clustering adjustment is justified by the fact that there are clusters in the population that we do not see in the sample. Clustering is an experimental design issue if the assignment is correlated within the clusters. We take the view that this second perspective best fits the typical setting in economics where clustering adjustments are used. This perspective allows us to shed new light on three questions: (i) when should one adjust the standard errors for clustering, (ii) when is the conventional adjustment for clustering appropriate, and (iii) when does the conventional adjustment of the standard errors matter.

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Document Object Identifier (DOI): 10.3386/w24003

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