Lags, Leave-Outs and Fixed Effects

Alexander Chudik, Cameron M. Ellis () and Johannes G. Jaspersen ()
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Cameron M. Ellis: https://tippie.uiowa.edu/people/cameron-ellis

No 2536, Working Papers from Federal Reserve Bank of Dallas

Abstract: To avoid endogeneity, financial economists often construct regressors and/or instruments using values from other observations, with lagged and leave-out variables being common examples. We examine the use of such variables in common settings with fixed effects and show that it can induce bias and distort inference. We illustrate the severity of this problem via simulations and with patent examiner data. Even when scrambling the patent examiners, thus removing any instrument validity, the bias leads to a first-stage F-statistic over 1,000. General and case-specific solutions are provided.

Keywords: lagged regressors; leave-out instruments; fixed effects; weak exogeneity bias; patents (search for similar items in EconPapers)
JEL-codes: C13 C36 D22 K0 (search for similar items in EconPapers)
Pages: 60
Date: 2025-09-23
New Economics Papers: this item is included in nep-ifn
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DOI: 10.24149/wp2536

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