A new subway opened the same year as the fare change

Question

An analyst uses difference-in-differences to estimate the effect of a transit fare cut in City A, comparing its ridership change to control City B, which did not change fares. The estimate is a large positive effect. You then learn that City A also opened a major new subway line the same year.

Explain how this coincident event undermines the difference-in-differences estimate, and what it does to the parallel-trends assumption.

Accepted Answer

A second change hit only the treated city. Difference-in-differences attributes the extra rise in City A's ridership, beyond City B's trend, to the fare cut. But City A had two things happen at once: the fare cut and a new subway line. Both plausibly raised ridership. The method cannot separate them, so it dumps the combined effect of both onto the fare cut, overstating it. This is a coincident shock, a confounder that lines up in time with the treatment and strikes only the treated group. Why parallel trends is violated. Parallel trends requires that, absent the fare cut, City A would have m…

A new subway opened the same year as the fare change

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