Difference-in-differences with Economic Factors and the Case of Housing Returns

Abstract

This paper studies how to incorporate observable factors in difference-in-differences and document their empirical relevance. We show that even under random assignment directly adding factors with unit-specific loadings into the difference-in-differences estimation results in biased estimates. This bias, which we term the “bad time control problem” arises when the treatment effect covaries with the factor variation. Researchers often control for factor structures by using: (i) unit time trends, (ii) pre-treatment covariates interacted Show more