Pre-test with Caution: Event-Study Estimates after Testing for Parallel Trends
- American Economic Review: Insights (Forthcoming)
This paper discusses two important limitations of the common
practice of testing for pre-existing differences in trends ("pre-trends") when using difference-in-differences and related methods.
First, conventional pre-trends tests may have low power. Second,
conditioning the analysis on the result of a pre-test can distort estimation and inference, potentially exacerbating the bias of point estimates and undercoverage of confidence intervals. I analyze these
issues both in theory and in simulations calibrated to a survey of
recent papers in leading economics journals, which suggest that
these limitations are important in practice. I conclude with practical recommendations for mitigating these issues.
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