Finance - Comparisons of methods of causal inference - Difference-in-differences

10 important questions on Finance - Comparisons of methods of causal inference - Difference-in-differences

What is the difference in difference analysis?

Can help us approximate: what would have happened had someone not been subject to a certain treatment?

When do you use difference-in-difference?

- If two groups are growing at a similar rate (parallel trend assumption)
- Pre and post-event data is available

What is the Golden experiment?

Randomly assign the sample into the "treatment" and "control" groups.
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How does difference in difference work?

We compare the post-treatment data with pre-treatment data for both the treatment and the control group, assuming that without treatment the treatment group would act as the control group.

What is the parallel trend assumption?

Trends in pre-treatment outcomes should be the same for treatment and control groups.

The changes should not start before the treatment begins (post)

What is the parallel trend assumption for?

Rule out the possibility that there was a difference between the control group and the treatment group before the event for another reason

What is the regression of the parallel-trend assumption?

Y = B0+B1*(treat*post)+B2*treat+B3*post+ei

Y= B0+B1*2004*treat+B2*treat*2005 etc

What are fixed effect regressions?

They are controlling for unobserved heterogeneity (such as differences between cities) - series of dummy variables

We can control for time-invariant characteristics (keep things constant)

Solves omitted variables that are time sensitive

What is Beta 1+ Beta 2

Spot where the treatment group would be without the treatment (should act the same as the control group)

What is Beta1 + Beta 3

Difference between treatment in pre and post period

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