Unbiased Shrinkage Estimation

Shrinkage estimation usually reduces variance at the cost of bias. But when we care only about some parameters of a model, I show that we can reduce variance without incurring bias if we have additional information about the distribution of covariates. In a linear regression model with homoscedastic Normal noise, I consider shrinkage estimation of the nuisance parameters associated with control variables. For at least three control variables and exogenous treatment, I establish that the standard least-squares estimator is dominated with respect to squared-error loss in the treatment effect even among unbiased estimators and even when the target parameter is low-dimensional. I construct the dominating estimator by a variant of James–Stein shrinkage in a high-dimensional Normal-means problem. It can be interpreted as an invariant generalized Bayes estimator with an uninformative (improper) Jeffreys prior in the target parameter.