Difference in Difference

Models

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Difference in difference models
Maybe the most popular identification
strategy in applied work today
Attempts to mimic random assignment
with treatment and comparison sample
Application of two-way fixed effects model

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 Problem set up
Cross-sectional and time series data
One group is treated with intervention
Have pre-post data for group receiving
intervention
Can examine time-series changes but,
unsure how much of the change is due to
secular changes

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Y

True effect = Yt2-Yt1

Estimated effect = Yb-Ya

Yt1

Ya

Yb

Yt2

t1 ti t2
time
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 Intervention occurs at time period t1
True effect of law
Ya Yb
Only have data at t1 and t2
If using time series, estimate Yt1 Yt2
Solution?

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Difference in difference models
Basic two-way fixed effects model
Cross section and time fixed effects
Use time series of untreated group to
establish what would have occurred in the
absence of the intervention
Key concept: can control for the fact that
the intervention is more likely in some
types of states
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 Three different presentations
Tabular
Graphical
Regression equation

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 Difference in Difference
Before After
Change Change Difference
Group 1 Yt1 Yt2 Yt
(Treat) = Yt2-Yt1
Group 2 Yc1 Yc2 Yc
(Control) =Yc2-Yc1
Difference Y
Yt Yc
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Y
Treatment effect=
(Yt2-Yt1) (Yc2-Yc1)

Yc1

Yt1

Yc2

Yt2
control

treatment

t1 t2
time
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 Key Assumption
Control group identifies the time path of
outcomes that would have happened in
the absence of the treatment
In this example, Y falls by Yc2-Yc1 even
without the intervention
Note that underlying levels of outcomes
are not important (return to this in the
regression equation)

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 Y

Yc1

Yc2
Yt1

control

Yt2 Treatment
effect=
(Yt2-Yt1)
treatment (Yc2-Yc1)

t1 t2
time
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 In contrast, what is key is that the time
trends in the absence of the intervention
are the same in both groups
If the intervention occurs in an area with a
different trend, will under/over state the
treatment effect
In this example, suppose intervention
occurs in area with faster falling Y

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 Y

Estimated treatment
Yc1

Yt1
Yc2

True treatment effect control

Yt2 True
Treatment
treatment Effect

t1 t2
time
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 Basic Econometric Model
Data varies by
state (i)
time (t)
Outcome is Yit
Only two periods
Intervention will occur in a group of
observations (e.g. states, firms, etc.)

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 Three key variables
Tit =1 if obs i belongs in the state that will
eventually be treated
Ait =1 in the periods when treatment occurs
TitAit -- interaction term, treatment states after
the intervention
Yit = 0 + 1Tit + 2Ait + 3TitAit + it

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 Yit = 0 + 1Tit + 2Ait + 3TitAit + it
Before After
Change Change Difference
Group 1 0 + 1 0+ 1+ 2+ 3 Yt
(Treat) = 2 + 3
Group 2 0 0 + 2 Yc
(Control) = 2
Difference Y = 3

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 When can you use DID

You want to Evaluate a program or treatment

You have treatment and control groups
You observe them before and after

BUT:
Treatment is not random
Other things were happening while intervention (treatment) was
in effect
You cant control for other confounders

Key Assumption:
Trend in control group approximates what would have happened
in treatment group in absence of treatment

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 Example

Does Free Lunch

Program introduced
in Sao Paulo in 2009
improved the
education Outcome?

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Why use regression instead of
cross tab
a) Free Estimate of Standard Error

b) Reduce bias from time trends

c)Increase precsion

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 Data
Dpost(before or after
Individual Y DTr(City) policy)
Miguel 40 0 0
Julia 80 1 1
Davi 20 0 0
Sophia 100 1 1
Gabriel 30 0 0
Isabela 0 1 0
Arthur 60 0 1
Mauela 40 1 0
Lucas 60 0 1
Giovanna 90 0 1

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Result

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