Inference with Difference-in-Differences Revisited

Abstract

Abstract A growing literature on inference in difference-in-differences (DiD) designs has been pessimistic about obtaining hypothesis tests of the correct size, particularly with few groups. We provide Monte Carlo evidence for four points: (i) it is possible to obtain tests of the correct size even with few groups, and in many settings very straightforward methods will achieve this; (ii) the main problem in DiD designs with grouped errors is instead low power to detect real effects; (iii) feasible GLS estimation combined with robust inference can increase power considerably whilst maintaining correct test size – again, even with few groups, and (iv) using OLS with robust inference can lead to a perverse relationship between power and panel length.