Assuming that the unobserved potential outcome for the treated unit would have continued smoothly and predictably after the treatment time (e.g. the line would have continued as it was before treatment time), we expect that the estimate produced by the DID estimator for this example overestimates the true treatment effect for the treated unit.

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Question restatement: The prompt asserts that if the unobserved potential outcome for the treated unit would have continued smoothly after the treatment time, the DID estimator would overestimate the true treatment effect. The only provided answer choice is: overestimates.

Analysis of the statement and underlying logic:
- The core idea behind a difference-in-differences (DID) design is to compare the treatment group to a control group, assuming that in the absence of treatment, both groups would have followed parallel trends (the parallel trends assumption).
- If, however, the counterfactual outcome for the treated unit (what would have happened without treatment) would have continued a smooth path that differs from the observed post-treatment trajectory, the measured post-treatment difference between treated and control groups may incorporate not only the true treatment effect but also a lingering divergence from the counterfactual path.
- In the depicted figure, the treated unit (blue line) deviates after treatment from its pre-treatment trend in a way that suggests a persistent shift, while the control unit (red line) follows a different trajectory. If the unobserved potential outcome would have kept evolving smoothly as before, the post-treatment gap could reflect both the treatment effect and the continuation of pre-treatment divergence. This tends to bias the DID estimate away from the true effect, often leading to an overstatement of the treatment impact on the treated unit.

Analysis of the given option (overestimates):
- Why this could be correct: The counterfactual path, if it would have continued smoothly, implies that the observed post-treatment difference includes more than the pure treatment effect. Hence DID would attribute some of that residual difference to treatment, resulting in an overestimate.
- Why this aligns with the figure: The blue line (treated) after treatment shows an upward bend relative to the control path, increasing the post-treatment gap beyond what the pure treatment effect might imply if the counterfactual path remained as pre-treatment.

Because there are no alternative options provided to evaluate, we cannot assess other potential explanations. However, given the standard interpretation of the figure and the stated assumption about the counterfactual path, the conclusion that the DID estimator overestimates the true treatment effect is consistent with the described scenario.

In summary, the statement overestimates is conceptually plausible under the assumption that the untreated counterfactual would have continued a smooth path and the observed post-treatment divergence includes influence beyond the true effect. The analysis hinges on the potential violation of the parallel-trends/counterfactualSmoothness intuition, which would bias the DID estimate upward in this setup.

FA25_QTM_110_1 Quiz #8: Difference in Differences

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Similar Questions

位置6的问题 Difference-in-differences is only valid when treated and untreated units have identical values for observable pre-treatment features.TrueFalseDon't Know清除选择

Select all of the statements that are true about Difference-In-Differences research designs:

The estimate produced by the DiD estimator in this example is:

For these two units, the parallel trends assumption is met.

Simply comparing the treated unit to the untreated unit in the post-treatment period would underestimate the true treatment effect.

Assuming there are no unequal shocks post-treatment, the DiD estimator is unbiased for the true treatment effect for the treated unit.

The estimate produced by the DiD estimator for this example is:

For these two units, the parallel trends assumption is met.

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