Accounting for the Black-White Wealth Gap: A Nonparametric Approach

TLDR: In this article, the Blinder-Oaxaca (B-O) method is used to decompose the mean intergroup difference in a given variable into the portion attributable to differences in the distribution of one or more explanatory variables and the part due to the difference in the conditional expectation function.

Abstract: Many applications involve a decomposition of the mean intergroup difference in a given variable into the portion attributable to differences in the distribution of one or more explanatory variables and that due to differences in the conditional expectation function. This article notes two interrelated reasons why the Blinder–Oaxaca (B–O) method—the approach most commonly used in the literature—may yield misleading results. We suggest a natural solution that both provides a more reliable answer to the original problem and affords a richer examination of the sources of intergroup differences in the variable of interest. The conventional application of the B–O method requires a parametric assumption about the form of the conditional expectation function. Furthermore, it often uses estimates based on that functional form to extrapolate outside the range of the observed explanatory variables. We show that misspecification of the conditional expectation function is likely to result in nontrivial errors in infer...