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When can we get away with using the two-way fixed effects regression?

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arxiv 2503.05125 v1 pith:HKMHKJ6I submitted 2025-03-07 econ.EM

classification econ.EM
keywords effectsfixedregressiontreatmenttwo-waycohortseffecttest
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The use of the two-way fixed effects regression in empirical social science was historically motivated by folk wisdom that it uncovers the Average Treatment effect on the Treated (ATT) as in the canonical two-period two-group case. This belief has come under scrutiny recently due to recent results in applied econometrics showing that it fails to uncover meaningful averages of heterogeneous treatment effects in the presence of effect heterogeneity over time and across adoption cohorts, and several heterogeneity-robust alternatives have been proposed. However, these estimators often have higher variance and are therefore under-powered for many applications, which poses a bias-variance tradeoff that is challenging for researchers to navigate. In this paper, we propose simple tests of linear restrictions that can be used to test for differences in dynamic treatment effects over cohorts, which allows us to test for when the two-way fixed effects regression is likely to yield biased estimates of the ATT. These tests are implemented as methods in the pyfixest python library.

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Cited by 1 Pith paper

Reviewed papers in the Pith corpus that reference this work. Sorted by Pith novelty score. Full citation record

  1. Efficient Difference-in-Differences and Event Study Estimators

    econ.EM 2025-06 accept novelty 8.0 of 10

    The authors derive closed-form efficient influence functions for DiD and event study parameters under parallel trends, yielding estimators that achieve the smallest possible asymptotic variance.

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