Explain how you would use Propensity Score Matching (PSM) to estimate causal effects in observational studies.
Instruction: Provide a step-by-step explanation of the Propensity Score Matching process, including how you would construct the propensity scores and how you would use them to match units.
Context: This question evaluates the candidate's understanding and practical know-how in handling observational data where random assignment is not possible. It tests the candidate's ability to implement Propensity Score Matching to reduce or eliminate the effects of confounding variables, demonstrating a sophisticated approach to approximating randomized experimental conditions.
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I would first specify the treatment, outcome, time zero, and target effect. For example, do we want the effect of a training program among its participants, or across all eligible employees? That choice determines whom the matched comparison should represent...