This is another post in my series of attempts to learn the data.table package for R and to get more comfortable with base R graphics. Today, I reimplement the data generating process and one of the models in this excellent blog post by Andrew Baker: How to create relative time indicators. I also strongly recommend watching Andrew’s talk on Difference-in-Differences staggered treatment designs.

For this exercise, we will only use two libraries:

library(data.table)
library(lfe)

As in the original post, the data generating process includes unit and time fixed effects, as well as unit-specific treatment effects.

$y_{it}=\alpha_i + \alpha_t + \tau_{it} + \varepsilon_{it}$ $\alpha_i,\alpha_t \sim N(0,1)$ $\varepsilon_{it} \sim N(0,0.5)$ $\mu_{it} \sim N(0.3,0.2^2)$

and $$\tau_{it}$$ is equal to the sum of each firm-specific $$\mu_{it}$$ since the start of the treatment period.

We have 1000 firms split into 4 cohorts which receive treatment in 1986, 1992, 1998, and 2004.

make_data = function() {

# unit fixed effects
unit = data.table(
unit    = 1:1000,
unit_fe = rnorm(1000, 0, 1),                # unit fe
state   = sample(1:40, 1000, replace=TRUE), # state id
mu      = rnorm(1000, .3, .2)               # treatment effect
)

# year fixed effects
year = data.table(
year    = 1980:2010,
year_fe = rnorm(31, 0, 1)
)

# treatment groups by state
treat_taus = data.table(
state       = sample(1:40, 40),
cohort_year = sort(rep(c(1986, 1992, 1998, 2004), 10))
)

# full interaction of unit X year
out = CJ(
unit = 1:1000,
year = 1980:2010
)
out = merge(out, unit, by="unit")
out = merge(out, year, by="year")
out = merge(out, treat_taus, by="state")

# error term, treatment indicator, and treatment effects
out[, error := rnorm(31000, 0, .5)][
, treat := fifelse(year >= cohort_year, 1, 0)][
, tau   := fifelse(treat == 1, mu, 0)]

# cumulative treatment effects
setkey(out, unit, year)
out[, tau_cum := cumsum(tau), by="unit"]

# dependent variable
out[, dep_var := unit_fe + year_fe + tau_cum + error]

return(out)

}

# Plot data from a single simulation

dat = make_data()

# empty plot window
plot(0,
type = "n",
ylim = c(-8, 20),
xlim = c(1980, 2010),
xlab = "",
ylab = "Outcome variable")

# one line per firm
for (i in 1:1000) {
lines(x   = dat[unit==i]$year, y = dat[unit==i]$dep_var,
}

# means by treatment cohort
cohorts = dat[, .(dep_var = mean(dep_var)), by=.(cohort_year, year)]

years <- c(
"#CC6677" = 1986,
"#332288" = 1992,
"#DDCC77" = 1998,
"#117733" = 2004
)

for (y in years) {
abline(v   = y,
col = names(years)[years==y],
lwd = 3)
lines(x   = cohorts[cohort_year==y]$year, y = cohorts[cohort_year==y]$dep_var,
col = names(years)[years==y],
lwd = 3)
}