# Introduction

The Synthetic Control Method is a causal inference technique, developed by Abadie and Gardeazabal in 2003, used to estimate the effects of interventions at an aggregate level.

It is particularly valuable when traditional experimental methods, such as randomized trials, are not feasible and can be considered an advanced form of the Difference-in-Difference method.

The core principle involves constructing a counterfactual for the treatment group using similar units that have not been affected by the intervention. The difference between this "synthetic" control group and the actual data serves as an estimate of the true effect. This synthetic group is created through a weighted combination of untreated units from the "donor pool."

The robustness of the results is then assessed through various checks and sensitivity analyses to ensure the evaluation's reliability.

# Implementation in Python

- First, let’s load the necessary packages (only the usual libraries, no specialized package in this example) and some sample data.
- Then we split the dataframe between Control groups (the “donor pool” ) and Treatment, and make a visual check.
- We can now fit a linear regression on the pre-treatment period, using scikit-learn.
- Finally, we use the fitted weights to create the synthetic group.
- We can calculate some metrics to assess the performance of the linear regression.
- Finally, we can look at the estimated effect of the treatment, by substracting the counterfactual to the treatment group.

```
# Import libraries
import pandas as pd
import numpy as np
import matplotlib.pyplot as plt
import seaborn as sns
from sklearn import linear_model
from sklearn.metrics import mean_squared_error, mean_absolute_error, r2_score
# Import source data
df = pd.read_csv('scm_data.csv').set_index('year')
df.head()
```

```
control_1 control_2 control_3 control_4 treatment
year
1990 224 122 76 682 1031
1991 251 151 82 660 1045
1992 260 152 84 655 1028
1993 254 136 85 790 1119
1994 286 152 86 794 1074
```

```
# Dataframe for 'donor pool' (control groups)
X = df.drop(columns={'treatment'})
# Dataframe for treatment group
Y = df[['treatment']]
# Plot all groups
sns.lineplot(Y, x='year', y='treatment')
for col in X.columns[1:]:
sns.lineplot(X, x='year', y=col, color='grey')
treatment_year = 2004
plt.axvline(x=treatment_year, color='firebrick', linestyle='--', lw=1)
```

The change in trend starting 2004 is very visible for the treatment group.

```
# Fit a linear regression
linear_reg = linear_model.LinearRegression(fit_intercept=False).fit(
X.loc[X.index <= treatment_year],
Y.loc[Y.index <= treatment_year]
)
# Get weights of the fitted model
weights = linear_reg.coef_[0]
weights
```

`array([ 1.0404247 , 2.05844824, -1.09116727, 0.88922022])`

```
# Compute the synthetic control group
X['synthetic'] = np.dot(X, weights)
# Plot synthetic group and treatment group
sns.lineplot(Y, x='year', y='treatment')
sns.lineplot(X, x='year', y='synthetic', linestyle='--')
```

```
# Performance metrics of the linear regression
Y_pred = X['synthetic'].loc[X.index <= treatment_year]
rmse = np.sqrt(mean_squared_error(Y.loc[Y.index <= treatment_year], Y_pred))
mae = mean_absolute_error(Y.loc[Y.index <= treatment_year], Y_pred)
r2 = r2_score(Y.loc[Y.index <= treatment_year], Y_pred)
print(f'RMSE: {rmse}')
print(f'MAE: {mae}')
print(f'R²: {r2}')
```

```
RMSE: 64.42106137354853
MAE: 50.00772638278276
R²: 0.9259623777267626
```

```
# Calculate effect of treatment
sns.lineplot(data=Y['treatment'] - X['synthetic'])
plt.axvline(x=treatment_year, color='firebrick', linestyle='--', lw=1)
```