Discussion paper
DP18916 Difference-in-Differences in Equilibrium: Evidence from Place-Based Policies
Violations of the stable unit treatment value assumption (SUTVA) are a common threat to identification of the equilibrium effects of policies. We show that the difference-indifferences estimator can be decomposed into three effects (autarky, re-sorting and contamination) and provide a formula to compute the contamination effect using the partial derivatives of supply and demand. We illustrate our argument by studying a large place-based tax break for housing construction in Uruguay. Overall, we find that SUTVA violations account for 25% of the effect on subsidized areas and lead to a sizable underestimation of the incidence of the tax break.
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