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one of the key assumptions of using Difference-in-Difference DID is the parallel trend assumption. explain briefly...

one of the key assumptions of using Difference-in-Difference DID is the parallel trend assumption. explain briefly what this assumption means

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Parallel Trend Assumption - It is the most analytic assumption of the rest of the four assumptions of Difference -in Difference and is the most difficult to fulfill. It states that if there is no treatment, the deviation between 'treatment' and control is constant over the time. However, no statistical test for this assumption exists, visible inspection is helpful when there are observations over many time points. Also, it is also seen, that lesser the time period tested, the more is the assumption to hold. Here we have stated an illustration for Parallel Trend Assumption and details are given below the graph.

The Parallel Trens Assumption states that ʎ1 - ʎ2  are both equal in the s=1 and s=2. The green dotted line represents assumed counterfactual.

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