Kyle F. Butts

Empirical work often uses treatment variables defined by geographic boundaries. When researchers ignore the common problem that the effects of treatment cross over borders, differences-in-differences produces biased estimates for the average treatment effect. In this paper, I identify two sources of bias. First, the control group no longer identifies the counterfactual trend because their outcomes are affected by treatment. Second, changes in treated units' outcomes reflect the effect of their own treatment status and the effect from the treatment status of "close" units. I use Monte Carlo simulations to demonstrate when the biases are particularly large. Further, I show that a common solution used in the literature of removing 'contaminated' control units only prevents one source of bias. Lastly, I propose improved estimation strategies that can remove both sources of bias.