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ECO 6175
ABEL BRODEUR
Week 7
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Difference-in-Differences
Outline:
I (1) Difference-in-Differences
I (4) Stata
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Objective:
Reference:
I Bertrand et al., 2004. “How Much Should We Trust
Differences-in-Differences Estimates?”
I Duflo, 2001. “Schooling and Labor Market
Consequences of School Construction in Indonesia”
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Difference-in-Differences
When to use DID
I Both with randomized experiments and with “natural”
experiments
I Need a group that is affected by the
policy/intervention (treatment) and a group that is not
affected (control)
I Need baseline and at least one round of follow-up
data
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Difference-in-Differences
t t u u
β̂DID = (Ȳpost − Ȳpre ) − (Ȳpost − Ȳpre )
Examples:
I Minimum wage increases in one province
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Difference-in-Differences
t t
1st idea: Ȳpost − Ȳpre
I This is not the causal effect
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Difference-in-Differences
t u
2nd idea: Ȳpost − Ȳpost
I This is not the causal effect
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Difference-in-Differences
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Difference-in-Differences
Regression:
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Difference-in-Differences
t t u u
β3 = (Ȳpost − Ȳpre ) − (Ȳpost − Ȳpre )
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Common Time Effects
εit = Φi + θt + µit
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Common Time Effects
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Difference-in-Differences
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Ashenfelter Dip (1978)
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Difference-in-Differences
Be careful!
I DID attributes any differences in trends between the
treatment and control groups, that occur at the same
time as the intervention, to that intervention
I If there are other factors that affect the difference in
trends between the two groups, then the estimation
will be biased!
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Sensitivity Analysis
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Different Trends
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Different Trends
εit = Φi + kg θt + µit
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Difference-in-Differences
β̂DID = β3 + kt − ku
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Difference-in-Differences
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Difference-in-Differences
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Difference-in-Differences
t t u u
β3 = [(Ȳpost − Ȳpre ) − (Ȳpost − Ȳpre )]
t t u u
− [(Ȳother − Ȳpre ) − (Ȳother − Ȳpre )]
= β3 − β5
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Generalize
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Triple Differences
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Difference-in-Differences
Pros:
I Apply well to many program evaluations
Cons:
I Often the rules of a program are not clear and not
random (or not followed)
I If the program tries to respond to differences in
trends, then it cannot be used for identification
I Internal validity (policies and natural experiments are
often endogenous)
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Duflo: School Construction
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Bertrand et al. (2004)
Most papers that employ DID use many years of data and
focus on serially correlated outcomes but ignore that the
resulting standard errors are inconsistent
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Stata
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