Henrik Winterhager Econometrics III Before After and Difference in Difference Estimators 1 Overview of non- experimental approaches: Before After and Difference in Difference Estimators

Henrik Winterhager Econometrics III Before After and Difference in Difference Estimators 2 1.Non-experimental approaches with panel data 2.Before After Estimators 3.Difference in Difference Estimators Hagen, Tobias und Bernd Fitzenberger (2004), Mikroökonometrische Methoden zur Ex-post-Evaluation, in: Hagen, Tobias und Alexander Spermann, Hartz-Gesetze – Methodische Ansätze zu einer Evaluierung, ZEW-Wirtschaftsanalysen, 74, S.45-72

Henrik Winterhager Econometrics III Before After and Difference in Difference Estimators 3 Evaluation with non-experimental approaches Cross Section DataPanel Data „Regression Discontinuity Design“ „Propensity Score Matching“ Instrumental Variables Approach (IV) Before After Estimators Difference in Difference Estimators (DiD) „ Propensity Score Matching“ + DiD Multivariate Separation Rate Models („Timing of Events“)

Henrik Winterhager Econometrics III Before After and Difference in Difference Estimators 4 Before After and Difference in Difference Estimators use Panel Data: Data for certain observation units (individuals / households / enterprises) for several points in time  Cross Section and Time Series elements (See later slides)

Henrik Winterhager Econometrics III Before After and Difference in Difference Estimators 5 Model: α i : individual effect, taken to be constant over time t and specific to the individual cross section unit i θ t : macroeconomic effect constant over the individual cross section ε it : „white-noise“-disturbance

Henrik Winterhager Econometrics III Before After and Difference in Difference Estimators 6 Assumption: Participants of treatment group and control group differ in unobserved time-constant characteristics: For instance: Motivation, Management Skills, Intelligence Question: What treatment effect is caused on an outcome variable y of the treated?

Henrik Winterhager Econometrics III Before After and Difference in Difference Estimators 7 Before After Estimators Concept: Comparison of an individual‘s outcome before and after a treatment ATT is estimated by: t: Point in time after treatment t‘: Point in time before treatment

Henrik Winterhager Econometrics III Before After and Difference in Difference Estimators 8 Calculation of the difference in average outcome variable before and after the treatment Elimination of time constant individual effects Difference is equivalent to the treatment‘s causal effect Assumption: E[y 0t |C=1] = E[y 0t‘ |C=1]

Henrik Winterhager Econometrics III Before After and Difference in Difference Estimators 9 Problem: Assumption is violated in case of: macroeconomic shocks (θ t ≠0) Lifecycle effects (e.g.: Outcome variable „income“ changes with age) Anticipation effects (e.g.: Job search intensity diminishes before participation in a job creation scheme)

Henrik Winterhager Econometrics III Before After and Difference in Difference Estimators 10 Solution: Difference in Difference Estimators ATT is estimated by: Idea: Outcome variable change in treatment group over time in excess of outcome variable change in non tr. group over time

Henrik Winterhager Econometrics III Before After and Difference in Difference Estimators 11 By calculating the differences twice, time constant individual effect as well as time varying effects identical over individuals are eliminated. Assumption: E[y 0t -y 0t‘ |C=1] = E[y 0t -y 0t‘ |C=0], i.e. Lifecycle effects on participants and non participants are identical