Question

You are hired by the government to evaluate the impact of a policy change that affects one group of individuals but not another. Suppose that before the policy change, members of a group affected by the policy averaged $17,000 in earnings, and members of a group unaffected by the policy averaged $16,400. After the policy change, members of the affected group averaged $18,200 in earnings while members of the unaffected group averaged $17,700 in earnings.

(a) How can you estimate the impact of the policy change? What is the name for this type of estimation?(b) What are the assumptions you have to make for this to be a valid estimate of the impact of the policy change?

Answer 1

Answer:

(a)

Average income of the affected group = $17,000

Average income of the unaffected group = $16,400

After policy implementation:

Average income of the affected group = $18,200

Average income of the unaffected group = $17,700

Therefore, change in income after policy:

Change in average income of affected group = $1200

Change in average income of unaffected group = $1300

Therefore, the new policy implementation will lead to the rise in the average income of both affected and unaffected group by $1200 and $1300 respectively.

This method of estimation is known as difference in differences estimation or double difference estimation.

(b) The assumption made under this estimation is that the economic condition of both affected and unaffected income group is the same and the trends of increase or decrease in the income within the groups are the same.