Alternatives to Polynomial Trend-Corrected Differences-In-Differences Models

Vincent Vandenberghe

No 2018001, LIDAM Discussion Papers IRES from Université catholique de Louvain, Institut de Recherches Economiques et Sociales (IRES)

Abstract: A common problem with differences-in-differences (DD) estimates is the failure of the parallel-trend assumption. To cope with this, most authors include polynomial (linear, quadratic…) trends among the regressors, and estimate the treatment effect as a once-in-a-time trend shift. In practice that strategy does not work very well, because inter alia the estimation of the trend uses post-treatment data. An extreme case is when sample covers only one period before treatment and many after. Then the trend's estimate relies almost completely on post-treatment developments, and absorbs most of the treatment effect. What is needed is a method that i) uses pre-treatment observations to capture linear or non-linear trend differences, and ii) extrapolates these to compute the treatment effect. This paper shows how this can be achieved using a fully-flexible version of the canonical DD equation. It also contains an illustration using data on a 1994-2000 EU programme that was implemented in the Belgian province of Hainaut.

Keywords: Treatment-Effect Analysis; Differences-in-Differences Models; Correction for trend differences (search for similar items in EconPapers)
JEL-codes: C21 C4 C5 (search for similar items in EconPapers)
Pages: 7
Date: 2018-01-25
New Economics Papers: this item is included in nep-ets
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Citations: View citations in EconPapers (1)

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Related works:
Journal Article: Alternatives to polynomial trend-corrected differences-in-differences models (2019)
Working Paper: Alternatives to Polynomial Trend-Corrected Differences-In-Differences Models (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:ctl:louvir:2018001

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