Interpreting the coefficients in dynamic two-way fixed effects regressions with time-varying covariates

Lihua Lin and Zhengyu Zhang

Economics Letters, 2022, vol. 216, issue C

Abstract: This paper discusses the causal interpretation of event study coefficients in a dynamic two-way fixed effects regression with time-varying covariates under a conditional parallel trends assumption. In addition to the “cross-lag contamination” problem noted by Sun and Abraham (2021), we find a new source of bias induced by the time-varying effect of the covariates. This covariate effect bias will not be eliminated even under treatment effect homogeneity and will remain in the canonical two-period difference-in-differences setting unless one makes more restrictive assumptions on the effects of covariates.

Keywords: Two-way fixed effects regression; Heterogeneous treatment effects; Time varying covariates; Conditional parallel trends assumption (search for similar items in EconPapers)
JEL-codes: C13 C23 C31 (search for similar items in EconPapers)
Date: 2022
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:216:y:2022:i:c:s0165176522001823

DOI: 10.1016/j.econlet.2022.110604

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