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Elm 3: inspect difference-in-differences assumptions

Advanced policy-review lab · Compare before-after, post-only and DiD contrasts, then challenge the missing counterfactual trend.

Learn → Try → ExplainReviewed 2026-11-01
01

The design question

Original fictional balanced panel:2 treated and 2 comparison units; pre 2, pre 1 and post. All treated units adopt after pre 1, controls never adopt. Target is post-period ATT under the stated assumptions. No staggered adoption, general two-way-fixed-effect estimator or event-study regression is implemented.

02

Group-period means

Every unit has all 3 observations; the two units per group receive equal weight. Use these means to calculate treated before-after, post-only group gap, DiD and pre-period gap change.

group   | pre2 | pre1 | post
treated | 12   | 14   | 21
control | 10   | 12   | 15
03

Your attempt

State the untreated parallel-trend assumption, no anticipation, no spillovers and stable measurement/cohort assumptions. Which missing counterfactual does DiD impute? Does a zero pre gap change prove the required post counterfactual?

Worked solution

Treated before-after is 21−14=7; post-only gap 21−15=6. DiD=(21−14)−(15−12)=4. Pre gap change=(14−12)−(12−10)=0. Under the identifying assumptions, the comparison trend 3 supplies the missing untreated treated-group change; without those assumptions 4 is only a descriptive contrast.

05

Do not overread a pre-check

The parallel-trends assumption concerns the treated group’s UNOBSERVED untreated post trajectory relative to controls. Similar pre paths support discussion but cannot prove that missing path; a low-power nonsignificant pre-test would not prove it either. A treated-only campaign beginning at adoption can bias the post contrast even after equal pre trends.

06

Sensitivity exercise

Let delta be the extra untreated treated-group trend from pre 1 to post, above the control trend. Adjusted effect=observed DiD−delta. Evaluate assumed delta 0,1,2,4 and explain the sign. These values are assumptions, not estimated confounding, confidence bounds or probabilities.

Sensitivity solution

Adjusted effects are 4,3,2,0. If the treated group would have increased 4 more than controls without treatment, the entire observed contrast could be explained by that differential trend. The fixture does not tell you which delta is plausible. Seek contextual evidence rather than selecting an assumption because it preserves a preferred sign.

08

Review and explain

Score 0–2 for ATT/timing, arithmetic, assumption clarity, pre-check limits and sensitivity interpretation. Reject missing/duplicate unit-periods or changing group in this balanced-panel exercise. Four units do not justify treating all 12 panel rows as independent observations; no significance or standard-error claim is supplied.

09

Authoritative reference

Read the official reference ↗

World Bank, Impact Evaluation in Practice resources. Read the difference-in-differences discussion and identifying assumptions. The Elm panel and exercises are original. Next: Elm 4.

Make the reasoning yours.

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