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Addressing Unobserved Heterogeneity in the Relationship Between Crime and Consumer Confidence

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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.

Methods

The 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 cross-sectional 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.

Conclusions

The 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.

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Notes

  1. Building on extensive Monte Carlo simulations, Bond and Eberhardt (2009) show that the AMG’s performance matches that of the popular Pesaran (2006) common correlated effects (CCE) estimators in terms of bias or RMSE in panels with nonstationary variables (cointegrated or not) and cross-sectional dependence.

  2. The dollar value used to define theft over and under has been changed multiple times in Canadian history. For example, the dollar value was $200 from 1977 to 1984, and then was increased to $1,000 between 1985 and 1994. From 1995 to the present, the dollar value has been $5,000. As the timeframe of the present research is from 1982 to 2005, it is necessary to aggregate the two offences to ensure consistency across time.

  3. Due to data limitations, the percentage of the population that is aboriginal is not available.

  4. Youth incarceration rate is not included due to data limitations.

  5. Lagged dependent variables may raise some complications in the FE estimators that can lead to biased estimates. Several authors have suggested solutions (Arellano and Bond, 1991; Arellano and Bover, 1995).

  6. The first generation panel data unit root tests (Maddala and Wu, 1999) also confirm the nonstationarity.

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Author information

Authors and Affiliations

  1. Department of Justice Canada, 284 Wellington Street, Ottawa, ON, K1A 0H8, Canada

    Ting Zhang

Authors
  1. Ting Zhang
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Correspondence to Ting Zhang.

Additional information

While the data collection and part of the data analysis of this work were completed at the Department of Justice Canada, the views expressed in this article are those of the author and do not necessarily represent the views of the Department of Justice Canada.

Appendices

Appendix 1

See Table 4.

Table 4 Index of Consumer Confidence Survey Questions
Full size table

Appendix 2

See Table 5.

Table 5 Cross-sectional Dependence Test and Panel Unit Root Test Results
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Zhang, T. Addressing Unobserved Heterogeneity in the Relationship Between Crime and Consumer Confidence. J Quant Criminol 32, 47–59 (2016). https://doi.org/10.1007/s10940-015-9253-x

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