| Abstract: | The difference-in-differences (DID) estimator is one of the most popular tools for applied research in economics to evaluate the effects of public interventions and other treatments of interest on some relevant outcome variables. However, it is well known that the DID estimator is based on strong identifying assumptions. In particular, the conventional DID estimator requires that, in the absence of the treatment, the average outcomes for the treated and control groups would have followed parallel paths over time. This assumption may be implausible if pre-treatment characteristics that are thought to be associated with the dynamics of the outcome variable are unbalanced between the treated and the untreated. That would be the case, for example, if selection for treatment is influenced by individual-transitory shocks on past outcomes (Ashenfelter's dip). This article considers the case in which differences in observed characteristics create non-parallel outcome dynamics between treated and controls. It is shown that, in such a case, a simple two-step strategy can be used to estimate the average effect of the treatment for the treated. In addition, the estimation framework proposed in this article allows the use of covariates to describe how the average effect of the treatment varies with changes in observed characteristics. |
