Suppose that in the future you are working for a consulting firm that advises cl

Question

Suppose that in the future you are working for a consulting firm that advises clients on market conditions, investment strategies, etc. A new client is interested in working with your company, and wants your company to conduct research on the impact that Shale gas development has on local labor markets. This company wants to show that Shale gas development creates jobs and is good for local towns/economies.

You are placed in charge of this research project, and collect data on employment, labor force participation, median income, and other demographics in counties where Shale gas development has occurred over the past two decades, and use nearby counties with no Shale gas development as a comparison group. You run your regressions and find statistically significant evidence that counties with Shale gas development have a lower unemployment rate and a higher labor force participation rate controlling for the other observables in your model. However, you notice that two out of the dozens of counties in your sample have extremely high rates of employment compared to the other counties, and when they are removed from the sample you no longer find statistically significant results.

How would you recommend presenting the results to your client? Do you think that in either case you run the risk of them taking future business elsewhere? If your boss, for instance, wants to keep them as a client, how would you deal with this type of situation?

Explanation / Answer

The significance of variable is driven by data and not by model. Moreover, outliers have a tendency to distort the true parameters and it is essential to remove such observations from the analysis. Thus, one has to remove the outlier and conclude that the lower uneployment rate and higher labor force are not statistical significant.

On the client front, it is better to stick with truth than manipulate the results for significant relationship. Client needs to be told the factual results than be impressed with inaccurate convenience.

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