A Linear Panel Model with Heterogeneous Coefficients and Variation in Exposure / Liyang Sun, Jesse M. Shapiro.

Format:

Book

Author/Creator:

Sun, Liyang.

Contributor:

National Bureau of Economic Research.

Shapiro, Jesse M.

Series:

Working Paper Series (National Bureau of Economic Research) no. w29976.

NBER working paper series no. w29976

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2022.

Summary:

Linear panel models featuring unit and time fixed effects appear in many areas of empirical economics. An active literature studies the interpretation of the ordinary least squares estimator of the model, commonly called the two-way fixed effects (TWFE) estimator, in the presence of unmodeled coefficient heterogeneity. We illustrate some implications for the case where the research design takes advantage of variation across units (say, US states) in exposure to some treatment (say, a policy change). In this case, the TWFE can fail to estimate the average (or even a weighted average) of the units' coefficients. Under some conditions, there exists no estimator that is guaranteed to estimate even a weighted average. Building on the literature, we note that when there is a unit totally unaffected by treatment, it is possible to estimate an average effect by replacing the TWFE with an average of difference-in-differences estimators.

Notes:

Print version record

April 2022.