JOURNAL OF APPLIED ECONOMETRICS

J. Appl. Econ. 29: 231–245 (2014)

Published online 7 January 2013 in Wiley Online Library
(wileyonlinelibrary.com) DOI: 10.1002/jae.2310

DIVORCE LAW REFORMS AND DIVORCE RATES IN THE USA:

AN INTERACTIVE FIXED-EFFECTS APPROACH

DUKPA KIMa AND TATSUSHI OKAb*

a
Department of Economics, Korea University, Seoul, Korea
b
Department of Economics, National University of Singapore, Singapore

SUMMARY
This paper estimates the effects of unilateral divorce laws on divorce rates in the USA from a panel of state-level
divorce rates. We use the interactive fixed-effects model to address the issue of endogeneity due to the association
between cross-state unobserved heterogeneity and divorce law reforms. We document that earlier studies in the
literature do not fully control for unobserved heterogeneity and result in mixed empirical evidence on the effects
of divorce law reforms. While reconciling these conflicting results, our results suggest that divorce law reforms
have temporal positive effects on divorce rates, thus confirming the 2006 findings of Wolfers. Via simulation
experiments, we assess the degree to which faulty inclusion or faulty exclusion of interactive fixed effects affects
the policy effect estimators. Our results suggest that faulty inclusion only results in efficiency loss whereas faulty
exclusion causes bias. Copyright © 2013 John Wiley & Sons, Ltd.

Received 17 September 2011; Revised 4 July 2012;

Supporting information may be found in the online version of this article.Supporting information

1. INTRODUCTION
Analyzing causal relationships between divorce rates and divorce law reforms has been of great interest
among economists. Important contributions in this area include Allen (1992), Peters (1986, 1992), Gray
(1998), Friedberg (1998) and Wolfers (2006). The empirical evidence reported in these studies signifi-
cantly differs depending on the dataset employed and econometric methods, and the debate is ongoing.1
The goal of this paper is to contribute to this literature by resolving the issues surrounding the work by
Wolfers (2006), who estimates the effects of unilateral divorce laws from a panel of state-level divorce
rates. In particular, we extensively use the interactive fixed-effects approach proposed by Bai (2009).
The estimation method used by Wolfers (2006) is common among a wide variety of empirical studies,
especially those applying the difference-in-differences method to regional-level panel data, and thus our
findings carry general implications to the broad empirical literature. Since regional-level data consist of
aggregates, the unobserved heterogeneity therein can be affected by a number of social and economic
factors and evolve over time in a complex way. Furthermore, regional-level panel data usually include
all available cross-sectional units rather than randomly sampled ones. As such, it is inappropriate to
assume cross-sectional independence, upon which many empirical studies rely for their estimation and in-
ference. Also, because regional panel data tend to include a longer time horizon than individual panel data,
it is important to take serial correlation into account, as pointed out by Bertrand et al. (2004).

* Correspondence to: Tatsushi Oka, Department of Economics, National University of Singapore, AS2 Level 6, 1 Arts Link, NA
117570 Singapore. E-mail: oka@nus.edu.sg
1
In terms of theoretical research, Becker (1981) presents a model predicting that divorce rates remain unchanged between mu-
tual consent and unilateral divorce laws. This is because the liberalization of divorce laws, as in the Coase theorem, would only
redistribute property rights between spouses. Rasul (2006) and Matouschek and Rasul (2008) provide alternative theories
predicting positive effects of unilateral divorce laws on divorce rates.

Copyright © 2013 John Wiley & Sons, Ltd.

232 D. KIM AND T. OKA

Related to these issues, recent studies cast doubt on Wolfers’ (2006) results in two regards. The first one is
the lack of robustness. Wolfers (2006) claims that the adoption of unilateral laws has only temporal effects
on divorce rates, rather than persistent effects claimed by Friedberg (1998). He estimates the model by the
weighted least squares (WLS), where the regression equation is weighted by the square root of state popu-
lation. Droes and Lamoen (2010) and Lee and Solon (2011) use a non-weighted equation or ordinary least
squares (OLS) and show that the OLS estimates indicate no effects of divorce law reforms. The premise in
the literature is that state effects, time effects and state-specific trends can capture the cross-state unobserved
heterogeneity, which is possibly correlated with divorce law reforms. If the unobserved heterogeneity is
properly controlled for, the OLS and WLS estimates should remain reasonably close to each other, given
the consistency of both estimators. We view the observed large discrepancy between the two estimates as
posing the question as to the validity of the assumptions both methods rely on—particularly the exogeneity
assumption. The second is that Wolfers (2006) uses standard errors appropriate only for both cross-sectionally
and serially independent errors. In our view, the interactive fixed-effects model gives a simple but flexible way
to capture unobserved heterogeneity while providing a natural solution for robust standard errors.2
Our results from the interactive fixed-effects model are robust to the selection of the weighting scheme.
Regardless of the weighting scheme used, we find that unilateral divorce laws have temporal effects on
divorce rates, which qualitatively confirms Wolfers’ (2006) key finding, even though the estimated
magnitude and duration are slightly smaller than his. Our results suggest that the model specifications
employed in existing studies do not fully control for the unobserved heterogeneity across states and thus
induce omitted variable bias whose direction depends on the weighting scheme. However, once the un-
observed heterogeneity is better accounted for via the interactive fixed-effects approach, the estimated
effects of divorce law reforms are robust to the weighting schemes.
We also address an issue raised by Lee and Solon (2011). They argue that the discrepancy between
the WLS and OLS estimates may be due to the misspecified functional form of the regression equation,
and estimate a model where the dependent variable is log of divorce rates. They find that both the WLS
and OLS under the alternative functional form agree upon statistically insignificant effects of divorce
law reforms. Using the log-transformed divorce rates, we show that, unlike the findings in Lee and So-
lon (2011), the interactive fixed-effects model is not sensitive to the functional forms of the regression
equation and suggests temporal effects of divorce law reforms.
We demonstrate the robustness of our results through simulation experiments. In the presence of
interactive fixed effects, both the WLS and OLS estimates are biased where the direction of bias
can be affected by the weighting scheme, while the interactive fixed-effects estimates remain fairly
unaffected by the weighting scheme. In the absence of interactive fixed effects, both the OLS and
WLS estimates are unbiased and the chance that the two estimates significantly differ from each other
is very small. Indeed, it is an extremely rare event to observe that the two estimates will differ as much
as in the estimated effects of divorce law reforms. The interactive fixed-effects estimates also remain
unbiased and thus are unlikely to capture non-existing reform effects or to fail to capture existing re-
form effects due to faulty inclusion of interactive fixed effects.
The remainder of the paper is organized as follows. The next section describes our econometric method.
Section 3 presents the estimation results on the effects of divorce law reforms on divorce rates. Section 4
provides some simulation results to examine the robustness of our approach. Section 5 concludes.

2. EMPIRICAL FRAMEWORK
In this section, we introduce the interactive fixed-effects model as an extension of the model used in
Wolfers (2006). He is responding to the most cited estimates of the time by Friedberg (1998) and

2
Cameron et al. (2011) propose multi-way cluster-robust variance estimators in panel data settings. Their method is useful when
one is interested in only correcting standard errors.

Copyright © 2013 John Wiley & Sons, Ltd. J. Appl. Econ. 29: 231–245 (2014)
DOI: 10.1002/jae
 DIVORCE LAW REFORMS AND DIVORCE RATES 233

shows his main points only minimally changing the specifications used in the previous study. Our
approach is essentially the same. We keep Wolfers’ specifications as much as possible and show
how inclusion of interactive fixed effects can resolve the issues surrounding his work.
The main equation of interest is given by
Rst ¼ Tst þ vst þ ust

where Rst represents the number of divorces per 1000 population in state s at time t (s = 1, . . ., S and
t = 1, . . ., T), Tst treatment effect of divorce law reforms, vst unobserved heterogeneity and ust a random
error. Most issues on this model are related to the assumptions made for the unobserved heterogeneity
vst and the error ust. In the following, we argue that the interactive fixed-effects model directly tackles
those issues by putting more structure on ust and provides potential solutions. We keep the same treat-
ment effects term Tst as Wolfers (2006), since it has fewer issues in the literature. That is:

Tst ¼ 1Ts ≤t≤Ts þ1 b1 þ 1Ts þ2≤t≤Ts þ3 b2

þ . . . þ 1Ts þ12≤t≤Ts þ13 b7 þ 1Ts þ14≤t b8

where 1A denotes an indicator function taking value one if the logical condition in A holds and zero
otherwise, and Ts indicates the reform year for state s.
The standard approach to model the unobserved heterogeneity vst is to use various dummy variables
and time functions. In particular, the specification Wolfers (2006) adopts from an earlier study is given by

vst ¼ as þ dt þ fs t þ gs t 2 (1)

where as is a state fixed effect, dt is a time fixed effect, and fs and gs are coefficients of state-specific
quadratic trends. Examples of the unobserved heterogeneity vst include demographic structure, social
and cultural factors such as the stigma of divorce, religious beliefs, family size, female participation
in the work force and contraceptive use (see Ellman and Lohr, 1998; Ellman, 2000).3 Many of these
factors change across states and time in diverse patterns and can affect both divorce rates and divorce
law reforms. One concern is that the standard approach in equation (1) is not flexible enough to fully
control for the true unobserved heterogeneity and causes bias in the resulting estimates of the treatment
effects. The other issue is that ust is often assumed to be cross-sectionally and serially independent. As
explained in the Introduction, this assumption seems unlikely and standard errors robust to the pres-
ence of cross-sectional and serial dependence seem necessary.
The interactive fixed-effects model assumes that
0
ust ¼ ls ft þ est
where ft is an r  1 vector of unobserved common shocks, ls is an r  1 vector to capture state-specific
reactions to the common shocks and est is an idiosyncratic error. ls and ft are also called factor loadings
and common factors, respectively. Statistically, the common factors correspond to the principal
components of the error term ust, which means that they are the dominant portion of divorce rates
not explained by the included regressors. One limitation is that no direct economic interpretation can
be given to the common factors since they are defined in a purely statistical sense. Nevertheless, the
common factor structure is quite appealing intuitively. For example, suppose that there are inflows
of young population from smaller states to neighboring bigger states. Such movements not only affect
divorce rates by changing the size of population at divorce risk but also are correlated with divorce
reforms because they create a higher demand for an easier divorce system within those states

3
Goldin and Katz (2002) analyze the effects of birth control pills on the professional career and marriage decision among
females.

Copyright © 2013 John Wiley & Sons, Ltd. J. Appl. Econ. 29: 231–245 (2014)
DOI: 10.1002/jae
234 D. KIM AND T. OKA

experiencing population inflows. Then, the vector of common factors ft would capture the general
movement of the young population while the loading vector ls would stand for the heterogeneous de-
gree to which each state is affected by ft.
State effects, time effects and state-specific trends can be regarded as special cases of interactive
fixed effects, because they can be written as an inner product of a vector of state-specific time-invariant
entries (as,1,fs,gs)0 and a vector of time-varying common shocks (1,dt,t,t2)0 . The difference is that the
form of common shock ft is determined by the data, while state effects, time effects, and state-specific
trends are of fixed form a priori. As a result, interactive fixed effects can control for a more general
form of unobserved heterogeneity, while the standard approach is more efficient if the included dummy
variables and time functions indeed represent the unobserved heterogeneity in the data.
The interactive fixed-effects model has previously been used to capture unobserved heterogeneity in
panel data analyses (see, among others, Goldberger, 1972; Chamberlain and Griliches, 1975; Joreskog
and Goldberger, 1975; Chamberlain, 1977). These studies consider the case for which the cross-sec-
tional dimension N is large while the time dimension T is small. MaCurdy (1982) considers a common
factor structure that is uncorrelated with the regressors. Holtz-Eakin et al. (1988) analyze a panel of
vector autoregressions with interactive fixed effects. Ahn et al. (2001, 2007) provide the generalized
method of moments (GMM) estimation method for a panel data model with interactive fixed effects.
Carneiro et al. (2003) analyze the identification of dynamic treatment effects models with a common
factor structure in the context of returns to schooling.
There are two important advances in the recent literature on the common factor model. First, the
common factors are allowed to be correlated with the included regressors and thus provide a potential
solution to the endogeneity problem.4 Second, the asymptotic theories are developed under general
assumptions on ft and est so that they can fully accommodate heteroskedasticity and serial correlation
in ust, not to mention that the factor structure itself implies cross-sectional dependence of ust. Pesaran
(2006) augments the regression equation with the cross-sectional averages of the dependent and
independent variables. Bai (2009), based on the principal component analysis, provides asymptotic
normality for the interactive fixed-effects model. Moon and Weidner (2010) consider the Gaussian
quasi-maximum likelihood framework with interactive fixed effects. Fernández-Val and Vella (2009)
study a two-step estimation method for a nonlinear model with time-variant fixed effects.
For the estimation, we adopt the method in Bai (2009). One of the reasons is that his estimator
pffiffiffiffiffiffiffi pffiffiffiffi
is NT consistent, whereas the one in Pesaran (2006) is N consistent. Also, Bai (2009) provides
a comprehensive estimation procedure to correct bias due to cross-sectional/serial correlation and
heteroskedasticity. As an alternative method, one might consider the correlated random effects or
Chamberlain–Mundlak approach. See, for instance, Wooldridge (2009). We employ the interactive
fixed-effects approach because it does not require specifying a particular relationship between the
regressors and unobserved components, unlike the Chamberlain–Mundlak approach.5
Bai (2009) proposes to estimate the regression coefficients and the factor structure by minimizing the
sum of squared residuals (SSR):
XT X S  2
0
SSR ¼ Rst  Tst  vst  ls ft (2)
t¼1 s¼1

Both the regression coefficients and the factor structure are unknown in practice. But, if we observe
one of them, the existing method can be applied to estimate the other. For instance, if the factor
0
structure ls ft is known, we can minimize the following SSR with respect to the regression coefficients:

4
We note an anonymous referee’s point that the interactive fixed effects model does not necessarily address the potential
endogeneity of treatment timing.
5
An anonymous referee asked us to examine the performance of the Mundlak approach. The results show that the Mundlak ap-
proach cannot resolve the discrepancy due to the weighting scheme. The results are available upon request.

Copyright © 2013 John Wiley & Sons, Ltd. J. Appl. Econ. 29: 231–245 (2014)
DOI: 10.1002/jae
 DIVORCE LAW REFORMS AND DIVORCE RATES 235

X S 
T X 2
ð1Þ
SSR1 ¼ yst  Tst  vst
t¼1 s¼1

ð 1Þ 0
where yst ¼ Rst  ls ft . On the other hand, if the
 regression coefficients
 are known, we can use the
S T
standard principal component analysis, where fls gs¼1 ; fft gt¼1 are estimated as minimizers of the
XT 0
following SSR with a commonly used normalization T 1 t¼1 ft ft ¼ Ir :
XT X S  2
ð2Þ 0
SSR2 ¼ yst  ls ft
t¼1 s¼1
ð2Þ
where yst ¼ Rst  Tst  vst .
The original minimization problem in equation (2) involves a nonlinear problem and does not have a
closed-form solution. Bai (2009) suggests an iterative method between two minimization problems
based on SSR1 and SSR2. The procedure is as follows:

Step 1: Obtain the least squares estimates based on SSR1, ignoring the common factor structure.
Given the coefficient estimates, subsequently estimate the factor structure by minimizing
SSR2 and continue to iterate between SSR1 and SSR2 until the percent change in the
SSR meets a certain threshold value.
Step 2: Estimate the factor structure based on SSR2, assuming that all regression coefficients are
zero. Given the estimated common factor structure, subsequently estimate the regression
coefficients by minimizing SSR1 and continue to iterate as in step 1.
Step 3: Pick up the set of estimates giving the smaller SSR from the two sets of estimates obtained in
steps 1 and 2.

We use 10 9 as the threshold value. In the analysis below, once we obtain a set of estimates from
steps 1–3, we correct bias using the correction terms in (23) and (24) in Bai (2009) and obtain the stan-
dard errors by using Theorem 4 in Bai (2009).
In the next section, we consider both the weighted and non-weighted equations. The weighted model
is simply obtained by multiplying all variables by the square root of state population. For each equation,
we provide both the least squares estimates and the interactive fixed-effects estimates. When the unob-
served heterogeneity is not fully accounted for, the direction of the bias in the least square estimates
can be affected by the weighting scheme unless the weights are independent of the regressors and the
uncontrolled unobserved heterogeneity. On the other hand, as long as the interactive fixed-effects
model is a reasonably good approximation to the true data generation process in both the weighted and
non-weighted equations, the estimates from both equations should be close to each other. This is precisely
what the estimation results show in the next section.

3. ESTIMATION RESULTS
For reference, Table I replicates the estimation results of the existing studies. The first three columns
report the WLS estimates in Wolfers (2006), where all models include state and time fixed effects.
The models in columns (2) and (3) also include state-specific linear and quadratic trends, respectively.
The last three columns in Table I present the OLS estimates. The specifications are otherwise identical to
those in the first three columns. The estimates in the first three columns confirm Wolfers’ findings that,
while the shift from mutual consent to unilateral divorce has temporal positive effects on divorce rates,
the effects are either significantly negative or insignificant in the long run. As documented in Droes and
Lamoen (2010) and Lee and Solon (2011), however, the OLS estimates are considerably different from
Copyright © 2013 John Wiley & Sons, Ltd. J. Appl. Econ. 29: 231–245 (2014)
DOI: 10.1002/jae
236 D. KIM AND T. OKA

Table I. Replications, dynamic effects of divorce law reforms

Weighted least squares Ordinary least squares

Basic Linear trends Quadratic trends Basic Linear trends Quadratic trends

(1) (2) (3) (4) (5) (6)

First 2 years 0.267*** 0.342*** 0.302*** 0.219 0.141 0.050

(0.085) (0.062) (0.054) (0.192) (0.096) (0.075)
3–4 years 0.210** 0.319*** 0.289*** 0.273 0.211** 0.062
(0.085) (0.070) (0.065) (0.194) (0.107) (0.092)
5–6 years 0.164* 0.300*** 0.291*** 0.425** 0.177 0.036
(0.085) (0.077) (0.079) (0.198) (0.121) (0.116)
7–8 years 0.158* 0.322*** 0.351*** 0.452** 0.250* 0.026
(0.084) (0.084) (0.097) (0.200) (0.132) (0.144)
9–10 years 0.121 0.081 0.161 0.703*** 0.133 0.210
(0.084) (0.091) (0.117) (0.203) (0.143) (0.177)
11–12 years 0.324*** 0.102 0.047 0.741*** 0.144 0.270
(0.083) (0.099) (0.142) (0.203) (0.154) (0.215)
13–14 years 0.461*** 0.202* 0.031 0.845*** 0.210 0.289
(0.084) (0.107) (0.167) (0.212) (0.168) (0.257)
15 years + 0.507*** 0.210* 0.251 0.776*** 0.311* 0.226
(0.080) (0.119) (0.205) (0.208) (0.187) (0.317)
Adjusted R2 0.931 0.973 0.982 0.852 0.972 0.986

Note: The sample period is 1956–1988. All regressions include state and time fixed effects. Standard errors are in parentheses.
Asterisks indicate significance at the *10%, **5% and ***1% levels.

the WLS estimates. In particular, the statistically insignificant estimates in the last column indicate no
effects of divorce law reforms.
The existing methods incorporating interactive fixed effects can be applied only to balanced panel
data. Since the dataset used in Wolfers (2006) has missing values in nine states, we conduct interpola-
tion based on the forth-order polynomial trend.6 We exclude Indiana and New Mexico because there
are missing observations around unilateral divorce law reforms, and we drop Louisiana because only
eight observations are available out of 33 years. As a result, the interpolation creates a balanced panel
which contains 48 states and 33 years (see Appendix for more details on the interpolation). The
estimates from the balanced panel are shown in Table II, where the column specifications parallel those
in Table I. The estimates are similar to those from the original data.7
We now turn to the interactive fixed effects model. The estimation procedure requires selecting the
number of common factors.8 It is known that over-specification of the number of common factors does
not cause inconsistency, but under-specification does (see, for instance, Moon and Weidner, 2010). We
augment zero to nine common factors to the model preferred in the literature, i.e. that with state effects,
time effects and state-specific quadratic trends. In Figure 1 we plot the estimates. Panels A.1 and A.2
show the estimates from the weighted model and Panels B.1 and B.2 from the non-weighted model.
Panels A.1 and B.1 show the results from zero to four common factors and Panels A.2 and B.2 from
five to nine common factors. The estimates in Panel A.1 vary across different numbers of common
factors. However, the estimates in Panel A.2 become very similar once more than six common factors

6
For the states in the treatment group, our interpolation applies separately before and after the divorce reforms. See details in the
Appendix.
7
The WLS estimates in the first three columns of Table II take positive and statistically significant values for the first eight years
and become negative or statistically insignificant after the ninth year. In column (3), the estimates for the first eight years are be-
tween 0.272 and 0.340, which are comparable to the corresponding values in Table I (0.289–0.351). The last three columns also
confirm the finding in Table I that the OLS estimates do not show strong positive association between divorce rates and divorce
law reforms. Furthermore, the standard errors keep similar magnitudes.
8
In this particular application, the information criteria in Bai and Ng (2002) give little guidance. Two criteria pick the maximum
number of factors and the other criterion picks the minimum.

Copyright © 2013 John Wiley & Sons, Ltd. J. Appl. Econ. 29: 231–245 (2014)
DOI: 10.1002/jae
 DIVORCE LAW REFORMS AND DIVORCE RATES 237

Table II. Dynamic effects of divorce law reforms: interpolated balanced panel

Weighted least squares Ordinary least squares

Basic Linear trends Quadratic trends Basic Linear trends Quadratic trends

(1) (2) (3) (4) (5) (6)

First 2 years 0.257*** 0.283*** 0.272*** 0.267 0.095 0.023

(0.086) (0.064) (0.055) (0.194) (0.096) (0.074)
3–4 years 0.211** 0.250*** 0.280*** 0.332* 0.159 0.049
(0.086) (0.072) (0.066) (0.198) (0.108) (0.091)
5–6 years 0.129 0.179** 0.271*** 0.526*** 0.091 0.055
(0.087) (0.080) (0.081) (0.203) (0.121) (0.115)
7–8 years 0.107 0.169* 0.340*** 0.561*** 0.157 0.024
(0.086) (0.087) (0.099) (0.205) (0.132) (0.142)
9–10 years 0.120 0.046 0.224* 0.747*** 0.067 0.148
(0.085) (0.094) (0.121) (0.206) (0.143) (0.175)
11–12 years 0.342*** 0.258** 0.137 0.853*** 0.052 0.195
(0.085) (0.101) (0.145) (0.208) (0.153) (0.212)
13–14 years 0.494*** 0.398*** 0.142 0.954*** 0.093 0.191
(0.085) (0.109) (0.172) (0.216) (0.167) (0.254)
15 years + 0.505*** 0.428*** 0.450** 0.818*** 0.222 0.007
(0.081) (0.121) (0.211) (0.209) (0.186) (0.314)
Adjusted R2 0.931 0.972 0.982 0.854 0.973 0.986

Note: See note to Table I.

are included. Likewise, Panels B.1 and B.2 show that the estimates stabilize once the number of
common factors is large enough. We choose seven common factors as our preferred specification in
the presence of quadratic trends.
Table III presents our main results. The specification of each column follows Table I, except that interactive
fixed effects are included. As discussed in the previous section, state-specific trends are regarded as a special
case of interactive fixed effects and we include additional common factors when the model is estimated with-
out linear or quadratic trends. The number of common factors is reported in the last row of the table.
The comparison between columns (1)–(3) and columns (4)–(6) of Table III indicates that our
approach resolves the conflicting results from the weighted and non-weighted equation models in Table I.
All columns of Table III show that the adoption of unilateral divorce laws has statistically significant
positive effects on divorce rates for the first eight years. The other estimates are statically insignificant with
two exceptions in column (1). In column (1), the coefficient estimates for 13–14 years and 15 years or later
are negative and statistically significant. Our estimation results overall agree with the key finding of
Wolfers (2006) that the effects of unilateral divorce laws are temporary. In terms of the magnitude and
duration of the effects, however, the comparison of column (3) in Table II and that in Table III shows that
the simple WLS overestimates the effects. However, if we view Wolfers’ (2006) results as stepping away
from the permanent reform effects previously claimed by Friedberg (1998), our results actually strengthen
Wolfers’ claim by eliminating potential bias in his estimates. In fact, the inclusion of interactive
fixed effects substantially reduces the SSR from 203.54 (195.32) to 30.05 (23.34) for the weighted
(non-weighted) model with quadratic trends.
Additionally, we examine an alternative model specification. By employing log of divorce rates as a
dependent variable, Lee and Solon (2011) show that the effects of divorce law reforms become statis-
tically insignificant in both the WLS and the OLS. They regard the sensitivity to the functional forms as
another reason to doubt the temporal effects of divorce law reforms.9 In Table IV, we report the estima-
tion results from the interactive fixed-effects model with log of divorce rates as a dependent variable.
The specification of trends and the weighting scheme employed in each column follow those in

9
We also confirm the sensitivity to the functional forms in the interpolated data. The results are available upon request.

Copyright © 2013 John Wiley & Sons, Ltd. J. Appl. Econ. 29: 231–245 (2014)
DOI: 10.1002/jae
238 D. KIM AND T. OKA

Figure 1. Dynamic effects of divorce law reforms for different numbers of common factors. Note: The sample period is
1956–1988. All models include state fixed effects, time fixed effects and state-specific quadratic time trends. The regres-
sion models in panels A.1 and A.2 are weighted by state population and those in panel B.1 and B.2 are not weighted

Tables I–III. As before, we select the number of common factors such that estimation results become
insensitive to the number of factors. We choose ten common factors for the model with quadratic
trends reported in columns (3) and (6) and include additional common factors according to the trend
specification for the rest.10 All columns show that the estimated effects of divorce law reforms are
statistically significant for eight years following the liberalization of divorce laws and subsequently
become insignificant. Moreover, the estimates are very close between the weighted and non-weighted
models, suggesting robustness to the functional forms as well as the weighting schemes.11

4. SIMULATION RESULTS
In this section, we assess the role of interactive fixed effects in the difference-in-differences framework
through simulation experiments. The simulation experiments are designed to examine the extent to
10
The estimation results for different numbers of common factors are available upon request.
11
We also conduct two robustness checks. The first one simply excludes the state of Nevada, whose peculiar trend might affect
our results as an outlier. We find that our results are robust to the exclusion of Nevada. The results are available upon request. The
second one adds reform dummies prior to the law reform years in the interactive fixed effects model. We find that the inclusion of
such dummies does not change our key finding. The details are reported in the online appendix.

Copyright © 2013 John Wiley & Sons, Ltd. J. Appl. Econ. 29: 231–245 (2014)
DOI: 10.1002/jae
 DIVORCE LAW REFORMS AND DIVORCE RATES 239

Table III. Dynamic effects of divorce law reforms: interactive fixed effects estimates

Weighted least squares Ordinary least squares

Basic Linear trends Quadratic trends Basic Linear trends Quadratic trends

(1) (2) (3) (4) (5) (6)

First 2 years 0.102*** 0.111*** 0.090** 0.066* 0.089** 0.082**

(0.035) (0.039) (0.038) (0.039) (0.039) (0.040)
3–4 years 0.126*** 0.148*** 0.140*** 0.199*** 0.236*** 0.228***
(0.047) (0.052) (0.052) (0.054) (0.051) (0.054)
5–6 years 0.098* 0.138** 0.112* 0.155** 0.215*** 0.183***
(0.059) (0.068) (0.067) (0.064) (0.062) (0.066)
7–8 years 0.102 0.202** 0.187** 0.125* 0.202*** 0.177**
(0.067) (0.083) (0.082) (0.075) (0.077) (0.081)
9–10 years 0.056 0.057 0.046 0.029 0.084 0.056
(0.071) (0.092) (0.093) (0.084) (0.09) (0.096)
11–12 years 0.087 0.036 0.053 0.04 0.084 0.035
(0.074) (0.104) (0.105) (0.091) (0.106) (0.113)
13–14 years 0.201*** 0.057 0.032 0.096 0.044 0.001
(0.075) (0.112) (0.116) (0.097) (0.119) (0.131)
15 years + 0.156* 0.035 0.037 0.006 0.154 0.125
(0.081) (0.123) (0.129) (0.109) (0.137) (0.157)
No. of factors 9 8 7 9 8 7

Note: See note to Table I.

which faulty exclusion or faulty inclusion of interactive fixed effects affects the policy effect estimators
considered in the previous section. We evaluate the performance of the following four estimators:

(a) WLS estimator: the least squares estimator in the weighted equation;
(b) OLS estimator: the least squares estimator in the non-weighted equation;
(c) Weighted IFE estimator: the interactive fixed-effects estimator in the weighted equation (seven
common factors);
(d) Non-weighted IFE estimator: the interactive fixed-effects estimator in the non-weighted equation
(seven common factors).

Throughout the simulation, state effects, time effects and state-specific quadratic time trends are al-
ways included. Estimator (a) is the WLS used in Wolfers (2006) and (b) is the OLS used in Droes and
Lamoen (2010) and Lee and Solon (2011).
The first simulation serves as an experiment to see the performances of the above four estimators
when the data-generating process (DGP) has no interactive fixed effects. We consider two DGPs
and report the results in Table V. The first DGP used in panel A is the weighted equation with indepen-
dently and identically normal (IIN) errors. The coefficients values are taken from column (3) of Table II
and the error variance is also computed using the residuals from the same regression.12 In panel B, the
second DGP is based on the non-weighted equation with IIN errors where the coefficients values and
the error variance are from column (6) of Table II. We estimate reform effects from the simulated data
by all four estimators (a)–(d). The number of repetitions is 10,000 for each DGP.
In Table V, column (1) shows the true reform effects used in the DGPs and columns (2)–(13) report
medians and 95% ranges of the four estimators (a)–(d). All median values reported in both panels A
and B are very close to the true values and show little discrepancy within each panel. This is a striking
contrast to the disagreement observed in columns (3) and (6) of Table II. It is worth noting that the 95%
range is obtained separately for each parameter and the entries in the same columns are not necessarily

12
The simulation results are very similar and our conclusion does not change, when the DGP is based on the estimates from the
original unbalanced panel.

Copyright © 2013 John Wiley & Sons, Ltd. J. Appl. Econ. 29: 231–245 (2014)
DOI: 10.1002/jae
240 D. KIM AND T. OKA

Table IV. Dynamic effects of divorce law reforms: interactive fixed effects estimates (Dependent variable: log
divorce rates)

Weighted least squares Ordinary least squares

Basic Linear trends Quadratic trends Basic Linear trends Quadratic trends

(1) (2) (3) (4) (5) (6)

First 2 years 0.016** 0.025*** 0.022*** 0.021** 0.024*** 0.028***

(0.006) (0.007) (0.007) (0.008) (0.009) (0.009)
3–4 years 0.038*** 0.052*** 0.051*** 0.05*** 0.055*** 0.06***
(0.008) (0.009) (0.01) (0.01) (0.011) (0.013)
5–6 years 0.041*** 0.053*** 0.048*** 0.038*** 0.044*** 0.05***
(0.01) (0.011) (0.012) (0.012) (0.014) (0.015)
7–8 years 0.045*** 0.051*** 0.048*** 0.039*** 0.046*** 0.053***
(0.012) (0.014) (0.015) (0.015) (0.017) (0.018)
9–10 years 0.02 0.025 0.019 0.019 0.024 0.033
(0.013) (0.017) (0.018) (0.017) (0.02) (0.021)
11-12 years 0.007 0.01 0.001 0.021 0.025 0.036
(0.014) (0.018) (0.02) (0.019) (0.023) (0.024)
13–14 years 0.004 0.003 0.012 0.019 0.021 0.033
(0.015) (0.02) (0.022) (0.021) (0.026) (0.027)
15 years + 0.009 0.011 0.001 0.041* 0.042 0.053
(0.016) (0.022) (0.025) (0.024) (0.03) (0.032)
No. of factors 12 11 10 12 11 10

Note: See note to Table I.

obtained from the same experiment. Thus we explore the chance that the WLS estimates capture bigger
policy effects than the OLS estimates. More precisely, we look at the chance that the WLS estimates
for the first eight years are simultaneously greater than the corresponding OLS estimates with the
differences being at least as large as those observed between columns (3) and (6) of Table II. In the
simulation, this probability is literally zero under both DGPs. This result strongly suggests that none of
the two DGPs is close to the true one.
On the other hand, we observe that neither IFE estimator causes systematic bias in the estimated policy
effects. The 95% ranges of the IFE estimators in columns (9)–(10) and (12)–(13) are slightly wider than
those in columns (3)–(4) and (6)–(7) but do not show systematic underestimation or overestimation. The
chance that the weighted IFE estimates for the first eight years are simultaneously smaller than the
corresponding WLS estimates at least by the differences between column (3) of Table II and column
(3) of III is zero under the first DGP and 0.0243 under the second DGP. Hence it is very unlikely that faulty
inclusion of interactive fixed effects wipes out all of the policy effects and leaves little to the policy
dummies. Moreover, the chance that the non-weighted IFE estimates for the first eight years are simulta-
neously larger than the corresponding OLS estimates at least by the differences between column (6) of
Table II and column (6) of Table III is 0.0031 and 0.0022 under the first and second DGP, respectively.
Hence it is also unlikely that faulty inclusion of interactive fixed effects captures non-existing policy effects.
In the second experiment, we instead consider two DGPs with seven common factors and present the
results in Table VI. The first DGP in panel A is weighted whereas the second one in panel B is not.
Throughout 10,000 replications, the first DGP keeps the common factors and factor loadings estimated
from the weighted equation, whereas the second DGP keeps those from the non-weighted equation.
The parameter values for regression coefficients and the variances of the errors are taken from columns
(3) and (6) of Table III, respectively, for the first and second DGPs. In both DGPs, the error is IIN.
The column specifications of Table VI parallel those of Table V. Column (2) in panel A clearly
indicates that the WLS overestimates the true reform effects, whereas column (5) shows that the
OLS underestimates. This is a remarkable result because this overestimation and underestimation
not only match the pattern found in columns (3) and (6) of Table II but also show that the weighting
scheme can change the direction of bias for a given set of common factors. We also look at the
Copyright © 2013 John Wiley & Sons, Ltd. J. Appl. Econ. 29: 231–245 (2014)
DOI: 10.1002/jae
 Table V. Simulation results, performances of policy effects estimators (no common factors in the DGPs)

Least squares Interactive fixed effects (7 common factors)

True value
WLS OLS Weighted Non-weighted

Median 2.5% 97.5% Median 2.5% 97.5% Median 2.5% 97.5% Median 2.5% 97.5%

Copyright © 2013 John Wiley & Sons, Ltd.

(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13)

Panel A: DGP is column (3) of Table II: (weighted equation with no common factors)
First 2 years 0.272 0.271 0.171 0.374 0.273 0.106 0.442 0.271 0.137 0.405 0.272 0.099 0.442
3–4 years 0.280 0.279 0.158 0.402 0.282 0.076 0.482 0.279 0.115 0.440 0.279 0.071 0.483
5–6 years 0.271 0.270 0.121 0.420 0.271 0.019 0.517 0.269 0.066 0.465 0.270 0.016 0.525
7–8 years 0.340 0.339 0.157 0.522 0.340 0.033 0.637 0.337 0.086 0.578 0.342 0.027 0.643
9–10 years 0.224 0.223 0.001 0.446 0.222 0.151 0.592 0.220 0.085 0.520 0.224 0.155 0.596
11–12 years 0.137 0.135 0.132 0.405 0.136 0.314 0.575 0.133 0.229 0.490 0.137 0.323 0.588
13–14 years 0.142 0.138 0.179 0.460 0.142 0.387 0.663 0.134 0.292 0.556 0.140 0.395 0.676
15 years + 0.450 0.449 0.059 0.840 0.447 0.189 1.074 0.443 0.083 0.966 0.446 0.198 1.095
Panel B: DGP is column (6) of Table II: (non-weighted equation with no common factors)
First 2 years 0.023 0.021 0.189 0.233 0.022 0.114 0.160 0.021 0.205 0.250 0.021 0.159 0.202
3–4 years 0.049 0.046 0.214 0.311 0.050 0.119 0.216 0.047 0.233 0.329 0.049 0.174 0.270
5–6 years 0.055 0.057 0.389 0.279 0.056 0.271 0.155 0.056 0.411 0.301 0.057 0.339 0.226
7–8 years 0.024 0.029 0.447 0.388 0.024 0.289 0.231 0.026 0.463 0.416 0.026 0.386 0.319
DIVORCE LAW REFORMS AND DIVORCE RATES

9–10 years 0.148 0.152 0.666 0.375 0.150 0.474 0.168 0.150 0.685 0.398 0.153 0.588 0.275
11–12 years 0.195 0.202 0.825 0.432 0.197 0.591 0.185 0.197 0.844 0.449 0.200 0.728 0.321
13–14 years 0.191 0.198 0.952 0.563 0.195 0.671 0.269 0.191 0.962 0.583 0.199 0.831 0.415
15 years + 0.007 0.013 0.948 0.925 0.009 0.590 0.565 0.011 0.944 0.926 0.017 0.779 0.753

Note: The number of repetitions is 10,000. Column (1) reports the true coefficients values in the DGP and columns (2)–(13) show the medians, 2.5th and 97.5th percentiles of the estimates
as indicated in the column headings.
241

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J. Appl. Econ. 29: 231–245 (2014)
 242

Table VI. Simulation results, performances of policy effects estimators (seven common factors in the DGPs)

True value Least squares Interactive fixed effects (7 common factors)

WLS OLS Weighted Non-weighted

Median 2.5% 97.5% Median 2.5% 97.5% Median 2.5% 97.5% Median 2.5% 97.5%

Copyright © 2013 John Wiley & Sons, Ltd.

(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13)

Panel A: DGP is column (3) of Table III (weighted equation with 7 common factors)
First 2 years 0.090 0.284 0.242 0.327 0.084 0.014 0.155 0.096 0.013 0.178 0.120 0.002 0.240
3–4 years 0.140 0.304 0.254 0.356 0.062 0.024 0.145 0.148 0.028 0.270 0.184 0.003 0.366
5–6 years 0.112 0.292 0.229 0.355 0.045 0.150 0.058 0.116 0.041 0.277 0.145 0.091 0.381
7–8 years 0.187 0.347 0.270 0.423 0.026 0.102 0.151 0.185 0.016 0.382 0.212 0.078 0.504
9–10 years 0.046 0.223 0.129 0.316 0.135 0.291 0.020 0.039 0.194 0.272 0.069 0.264 0.409
11–12 years 0.053 0.124 0.012 0.236 0.188 0.376 0.004 0.038 0.219 0.302 0.056 0.318 0.433
13–14 years 0.032 0.127 0.005 0.262 0.200 0.421 0.018 0.044 0.332 0.250 0.013 0.430 0.406
15 years + 0.290 0.617 0.274 0.359 0.556
D. KIM AND T. OKA

0.037 0.454 0.011 0.255 0.033 0.288 0.097 0.364

Panel B: DGP is column (6) of Table III (non-weighted equation with 7 common factors)
First 2 years 0.082 0.128 0.055 0.201 0.013 0.035 0.060 0.063 0.040 0.167 0.077 0.003 0.152
3–4 years 0.228 0.177 0.087 0.269 0.036 0.022 0.093 0.214 0.063 0.369 0.220 0.115 0.328
5–6 years 0.183 0.126 0.011 0.242 0.073 0.147 0.000 0.161 0.038 0.363 0.169 0.032 0.310
7–8 years 0.177 0.174 0.030 0.319 0.040 0.131 0.048 0.159 0.090 0.408 0.161 0.011 0.339
9–10 years 0.056 0.006 0.172 0.188 0.171 0.283 0.062 0.045 0.242 0.332 0.036 0.166 0.250
11–12 years 0.035 0.114 0.329 0.105 0.216 0.352 0.083 0.032 0.294 0.354 0.014 0.217 0.258
13–14 years 0.001 0.143 0.404 0.120 0.208 0.372 0.047 0.006 0.363 0.376 0.022 0.286 0.257
15 years + 0.125 0.038 0.285 0.362 0.015 0.216 0.184 0.154 0.271 0.574 0.106 0.197 0.425

Note: See note to Table V.

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J. Appl. Econ. 29: 231–245 (2014)
 DIVORCE LAW REFORMS AND DIVORCE RATES 243

probability that the WLS estimates for the first eight years are simultaneously larger than the
corresponding weighted IFE estimates. It is 0.3937 under the first DGP with the differences between
the two estimates being at least as large as those observed between column (3) of Table II and column
(3) of Table III. In contrast, columns (8) and (11) in panel A indicate that both IFE estimates show ex-
cellent performance, although the non-weighted IFE estimates show a small upward bias. This bias
seems to be due to the fact that removing weights from the simulated data actually ruins the exact fac-
tor structure. But the interactive fixed-effects model still produces reasonably good estimates.
In panel B of Table VI, columns (8) and (11) show that both IFE estimators perform very well. Column
(5) shows that the OLS underestimates. The probability that the OLS estimates for the first eight years are
simultaneously smaller than the corresponding non-weighted IFE estimates with the differences at least as
large as those observed between column (6) of Table II and column (6) of Table II is 0.3476 under the
second DGP. The direction of bias again changes when the equation is weighted in the sense that the
WLS estimates in column (2) are considerably bigger than the OLS estimates. The median values for
the WLS estimates are close to the true ones. But, this should not be taken as evidence that the WLS es-
timator performs well, because we do know that the regressors and the errors are correlated in the simu-
lated data and there should be some bias. Rather, it appears to be just a lucky case where a particular
weighting scheme reduces the size of bias.
In summary, the simulation experiments here suggest that the interactive fixed-effects estimates are
robust to the absence of common factors in the true model. The cost seems to be only slightly wider
confidence intervals.13 On the other hand, failing to control for existing common factors could cause
serious bias and the direction of bias can be affected by the weighting scheme.

5. CONCLUSION
In this paper we present some evidence on the effects of divorce law reforms on divorce rates in the
USA. Using the interactive fixed-effects model to control for cross-state unobserved heterogeneity,
we reconcile the conflicting results from the WLS and OLS estimates found in recent empirical studies.
In effect, we find that the interactive fixed-effects estimates remain fairly unaffected by the weighting
scheme, which suggests that the standard specification of unobserved heterogeneity in the literature
may not be flexible enough to fully control for the unobserved heterogeneity. We show the robustness
of the model with interactive fixed effects, via simulation experiments. The use of interactive fixed
effects allows researchers to implement robust inference in the difference-in-differences framework.
We consider that our findings have general implications to a wide variety of empirical studies, in
particular policy evaluation studies based on the difference-in-differences.

ACKNOWLEDGEMENTS

We would like to thank Co-editor Edward Vytlacil and four anonymous referees for their valuable
suggestions, which improved the overall quality of the paper. We thank Leora Friedberg, Steven Stern,
Gary Solon, Justin Wolfers, Cathy Shaw, Jonathan Smith, Shinsuke Tanaka, Marian Vidal-Fernandez,
Ken Yamada and participants of the 2011 meetings of the Midwest Econometrics Group for many
helpful comments and suggestions. The first author gratefully acknowledges the financial support from
the Bankard fund at the University of Virginia.

13
In Table VI, the 95% ranges for the WLS and OLS estimates are smaller than those of the IFE estimates. On the other hand,
the standard errors reported in Table II are larger than the corresponding values in Table III. This is because the standard errors in
Table II are obtained assuming i.i.d. errors and thus are not representing the true standard deviation of the sampling distribution
when there are indeed interactive fixed effects.

Copyright © 2013 John Wiley & Sons, Ltd. J. Appl. Econ. 29: 231–245 (2014)
DOI: 10.1002/jae
244 D. KIM AND T. OKA

APPENDIX A: INTERPOLATION TO CREATE THE BALANCE PANEL

To create the balanced panel data used in Section 4, we conduct interpolation. We exclude three states:
Indiana, Louisiana and New Mexico. Indiana and New Mexico are dropped because there are missing
observations around the reform years, as shown in Table A.I. We exclude Louisiana because only eight
observations are available out of 33 years.
Table A.II shows the six states to which we apply interpolation. We fit the fourth-order polynomial
trend separately for each state and for each regime (before and after the divorce law reform). More pre-
cisely, the model is

Rst ¼ a0 þ a1 t þ a2 t 2 þ a3 t 3 þ a4 t 4 þ est ;

where est is an approximation error. We impute the fitted values if the observations are missing.
Instead of the interpolation, one can use the data from 1959 to 1988, which is balanced after exclud-
ing three states in Table A.I.14 The sample period of this alternative balanced panel is shorter than the
sample period used in the original unbalanced panel data. Thus we report the results based on the in-
terpolated panel data. Using this alternative balanced panel, however, we conduct the same analysis
and find qualitatively similar results, which are available upon request.

Table A.I States excluded from the analysis

State Number of missing values Missing years Law reform year

IN 6 1970–1973, 1975, 1988 1973

LA 25 1956–1975, 1977, 1981–1988 2000
NM 9 1968–1969, 1971–1973, 1981–1982, 1986–1987 1973

Table A.II States included in the analysis with interpolation

Number of obs. between

1955 and 1988
Number of
State missing values Missing years Law reform year before after

IL 2 1956–1957 2000 31 NA
KY 3 1956–1958 1972 13 17
MA 1 1956 1975 18 14
NC 2 1956–1957 2000 31 NA
NY 2 1956–1957 2000 31 NA
WV 2 1956–1957 2000 31 NA

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