Difference-in-Differences – Applying the Parallel Trend Assumption with Multiple Time Periods

difference-in-differenceeconometricsregression

I am performing this resgression:
$$
y_{it} = \beta_{0} + \beta_{1}\text{Treat}_{i} + \sum_{j \neq k} \lambda_{j} \text{Year}_{t=j} + \sum_{j \neq k} \delta_j \left( \text{Treat}_i \cdot \text{Year}_{t=j} \right) + X_{it}'\gamma + \epsilon_{it}.
$$

Yit – is a binary variable
time periods t=1,2,…,k,…,T
the treatment happens between k and k+1 (so time k is my last pre-treatment period).

My question is how to present to parallel trend assumption.
I understand that there are 2 methods:
1. If coefficients δ before treatment are essentially zero.
(If I get this right the 2 option are that they are equal or close to 0 and statistically significant or they are not equal to 0 and not statistically significant).
2. Run the regression separately for the treatment and control groups. Instead of a series of treat*quarter coefficients, we have just quarter coefficients for each group, and then plot those on the same graph.

Do I understand it correctly? what is the proper way to present it?

would appreciate your help, Thank you!

Best Answer

Both methods are doing something very similar: comparing trends between treatment and control. The first has the advantage of being able to easily test the joint null that all the pre $\delta$s are zero, rather than just comparing the coefficients visually, one by one. Moreover, the pooled model will probably yield more precise estimates than two separate models.

The second might be easier to explain to folks that don't understand interactions and makes it easier to plot the coefficients (rather than their difference).