Are Difference-in-Differences Estimates Blowing Smoke? A Cautionary Tale From an Oft-Used Natural Experiment

51 Pages Posted: 6 Jul 2021

See all articles by Anthony Zdrojewski

Anthony Zdrojewski

Rice University

Alexander W. Butler

Rice University - Jesse H. Jones Graduate School of Business

Date Written: June 21, 2021

Abstract

We illustrate the sensitivity of two-way fixed effects difference-indifferences estimates to innocuous changes in data structure. Using the staggered rollout of state-level bank branching deregulations, three outcome variables are brought to bear on the interventions: personal income growth (a replication), house prices (new to the literature), and per capita cigarette consumption (a falsification test). Estimates are sensitive to panel length, and we document that the data structure creates the false impression of a causal effect of the interventions on all three outcome variables. We contend that any test using this particular natural experiment is at risk of generating spurious results.

Keywords: banking, deregulation, economic growth, difference-indifferences, two-way fixed effect estimation

JEL Classification: C13, C18, C23, G21, G28, O47

Suggested Citation

Zdrojewski, Anthony and Butler, Alexander W., Are Difference-in-Differences Estimates Blowing Smoke? A Cautionary Tale From an Oft-Used Natural Experiment (June 21, 2021). Available at SSRN: https://ssrn.com/abstract=3871311 or http://dx.doi.org/10.2139/ssrn.3871311

Anthony Zdrojewski

Rice University ( email )

6100 South Main Street
Houston, TX 77005-1892
United States

Alexander W. Butler (Contact Author)

Rice University - Jesse H. Jones Graduate School of Business ( email )

MS 531
Houston, TX 77005
United States
713-348-6341 (Phone)

HOME PAGE: http://www.owlnet.rice.edu/~awbutler/

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