Template-type: ReDIF-Paper 1.0
Author-Name: Zoë Fannon
Author-Workplace-Name: Somerville College, University of Oxford
Author-Email: zoe.fannon@economics.ox.ac.uk
Author-Name: B. Nielsen
Author-Workplace-Name: Nuffield College, University of Oxford
Author-Email: bent.nielsen@nuffield.ox.ac.uk
Title: Age-period cohort models
Abstract: Outcomes of interest often depend on the age, period, or cohort of the individual observed,
where cohort and age add up to period. An example is consumption: consumption patterns change over the life-cycle (age) but are also affected by the availability of products at different
times (period) and by birth cohort-specific habits and preferences (cohort). Age-period-cohort (APC) models are additive models where the predictor is a sum of three time effects, which are
functions of age, period and cohort, respectively. Variations of these models are available for data aggregated over age, period, and cohort, and for data drawn from repeated cross-sections,
where the time effects can be combined with individual covariates. The age, period and cohort time effects are intertwined. Inclusion of an indicator variable for each level of age, period, and cohort results in perfect collinearity, which is referred to as “the
age-period-cohort identification problem”. Estimation can be done by dropping indicator variables. However, this has the adverse consequence that the time effects are not individually
interpretable and inference becomes complicated. These consequences are avoided by decomposing the time effects into linear and non-linear components and noting that the
identification problem relates to the linear components, whereas the non-linear components are identifiable. Thus, confusion is avoided by keeping the identifiable non-linear components of
the time effects and the unidentifiable linear components apart. A variety of hypotheses of practical interest can be expressed in terms of the non-linear components
Length: 33 pages
Creation-Date: 2018-11-28
Number: 2018-W04
File-URL: https://www.nuffield.ox.ac.uk/economics/Papers/2018/2018W04_age_period_cohort_models.pdf
File-Format: application/pdf
Handle: RePEc:nuf:econwp:1804