Difference in Difference (DD) is a commonly used empirical estimation technique in economics. Let us take a hypothetical example where a state (Wisconsin) passes a bill which makes employer-provided health insurance tax deductible. Let us also assume that in the year after the bill passed (year 2) the percentage of firms offering health insurance increased by 50% compared to the year before the bill was passed (year 1). In order to estimate the impact of the of the bill on the percentage of firms offering health insurance, we could simply do a ‘before and after’ analysis and conclude that the bill increased insurance offerings by 50%. The problem is that there could be a trend over time for more employers to offer insurance. It is impossible to identify if the tax deductibility or the time trend caused this increase in firm offering...
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