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

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  • Jonathan Roth

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.

Suggested Citation

  • Jonathan Roth, 2022. "Pretest with Caution: Event-Study Estimates after Testing for Parallel Trends," American Economic Review: Insights, American Economic Association, vol. 4(3), pages 305-322, September.
    • Handle: RePEc:aea:aerins:v:4:y:2022:i:3:p:305-22
    DOI: 10.1257/aeri.20210236
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    More about this item

    JEL classification:

    • A14 - General Economics and Teaching - - General Economics - - - Sociology of Economics
    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation

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