Using Causal Diagrams to Assess Parallel Trends in Difference-in-Differences Studies

Difference-in-differences (DID) is popular because it can allow for unmeasured confounding when the key assumption of parallel trends holds. However, there exists little guidance on how to decide a priori whether this assumption is reasonable. We attempt to develop such guidance by considering the relationship between a causal diagram and the parallel trends assumption. This is challenging because parallel trends is scale-dependent and causal diagrams are generally scale-independent. We develop conditions under which, given a nonparametric causal diagram, one can reject or fail to reject parallel trends. In particular, we adopt a linear faithfulness assumption, which states that all graphically connected variables are correlated, and which is often reasonable in practice. We show that parallel trends can be rejected if either (i) the treatment is affected by pre-treatment outcomes, or (ii) there exist unmeasured confounders for the effect of treatment on pre-treatment outcomes that are not confounders for the post-treatment outcome, or vice versa. We also argue that parallel trends should be strongly questioned if (iii) the pre-treatment outcomes causally affect the post-treatment outcomes, since there exist reasonable semiparametric models in which such an effect violates parallel trends. When (i-iii) are absent, a necessary and sufficient condition for parallel trends is that the association between unmeasured confounders and potential outcomes is constant on an additive scale, pre- and post-treatment. We discuss our approach in the context of the effect of Medicaid expansion under the US Affordable Care Act on health insurance coverage rates.