Working Paper: NBER ID: w29976
Authors: Liyang Sun; Jesse M. Shapiro
Abstract: 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.
Keywords: linear panel models; two-way fixed effects; coefficient heterogeneity; health care expenditures; Medicare
JEL Codes: C23; C87
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| insurance coverage (G52) | expenditures varies by state (H75) |
| Medicare enactment (I18) | total health care expenditures (H51) |
| TWFE estimator (C51) | biased estimates (C51) |
| unit unaffected by treatment (C22) | average effect from difference-in-differences estimators (C22) |