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Pretest with Caution: Event-Study Estimates after Testing for Parallel Trends

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Abstract

This paper discusses two important limitations of the common practice of testing for preexisting 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 pretest can distort estimation and inference, potentially exacerbating the bias of point estimates and under-coverage 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.

Citation

Roth, Jonathan. 2022. "Pretest with Caution: Event-Study Estimates after Testing for Parallel Trends." American Economic Review: Insights, 4 (3): 305-22. DOI: 10.1257/aeri.20210236

Additional Materials

JEL Classification

  • A14 Sociology of Economics
  • C23 Single Equation Models; Single Variables: Panel Data Models; Spatio-temporal Models
  • C51 Model Construction and Estimation