A Causal Framework for Evaluating Drivers of Policy Effect Heterogeneity Using Difference-in-Differences

Abstract: Policymakers and researchers often seek to understand how a policy differentially affects a population and the pathways driving this heterogeneity. For example, when studying an excise tax on sweetened beverages, researchers might assess the roles of cross-border shopping, economic competition, and store-level price changes on beverage sales trends. However, traditional policy evaluation tools, like the difference-in-differences (DiD) approach, primarily target average effects of the observed intervention rather than the underlying drivers of effect heterogeneity. Common approaches to evaluate sources of heterogeneity often lack a causal framework, making it difficult to determine whether observed outcome differences are truly driven by the proposed source of heterogeneity or by other confounding factors. In this paper, we present a framework for evaluating such policy drivers by representing questions of effect heterogeneity under hypothetical interventions and use it to evaluate drivers of the Philadelphia sweetened beverage tax policy effects. Building on recent advancements in estimating causal effect curves under DiD designs, we provide tools to assess policy effect heterogeneity while addressing practical challenges including confounding and neighborhood dynamics.