Addressing Unobserved Heterogeneity in the Relationship Between Crime and Consumer Confidence

Abstract

Objectives This study revisits the relationship between property crime and economic conditions with the latter being represented by a collective economic perception variable in the form of the Index of Consumer Confidence (ICC). The present work takes this application to assess the severity of cross-sectional dependence and nonstationarity, two issues that are deemed pervasive in macro panels but have not been given sufficient consideration in previous research. MethodsThe dataset comprises information for five Canadian regions over a time period of 24 years from 1982 to 2005. The study compares the parameter estimates and residual properties of the commonly used two-way fixed effects (2FE) model and the augmented mean group (AMG) estimator where the latter can accommodate nonstationarity and crosssectional dependence that potentially arise from unobserved common factors.Results In contrast to the 2FE approach, when using the AMG estimator one can reject the null hypothesis that the current ICC has no impact on crime. Some of the effects still hold when an alternative economic indicator, the unemployment rate of young males, is added to the model. Diagnostic tests confirm that the commonly used 2FE estimator yields nonstationary and cross-sectional dependent residuals, whereas the heterogeneous parameter model produces more favorable diagnostic results. ConclusionsThe findings provide evidence supporting the hypothesis that subjective measures of economic conditions are linked to financially-motivated crime rates. Through this application, the study demonstrates the importance of examining underlying data properties and regression residuals in empirical work to ensure the validity of estimates.