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Concept
Difference in differences
Summary
Difference in differences (DID or DD) is a statistical technique used in econometrics and quantitative research in the social sciences that attempts to mimic an experimental research design using observational study data, by studying the differential effect of a treatment on a 'treatment group' versus a 'control group' in a natural experiment. It calculates the effect of a treatment (i.e., an explanatory variable or an independent variable) on an outcome (i.e., a response variable or dependent variable) by comparing the average change over time in the outcome variable for the treatment group to the average change over time for the control group. Although it is intended to mitigate the effects of extraneous factors and selection bias, depending on how the treatment group is chosen, this method may still be subject to certain biases (e.g., mean regression, reverse causality and omitted variable bias).
In contrast to a time-series estimate of the treatment effect on subjects (which analyzes differences over time) or a cross-section estimate of the treatment effect (which measures the difference between treatment and control groups), difference in differences uses panel data to measure the differences, between the treatment and control group, of the changes in the outcome variable that occur over time.
Difference in differences requires data measured from a treatment group and a control group at two or more different time periods, specifically at least one time period before "treatment" and at least one time period after "treatment." In the example pictured, the outcome in the treatment group is represented by the line P and the outcome in the control group is represented by the line S. The outcome (dependent) variable in both groups is measured at time 1, before either group has received the treatment (i.e., the independent or explanatory variable), represented by the points P1 and S1. The treatment group then receives or experiences the treatment and both groups are again measured at time 2.
Official source
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