Design‐robust two‐way‐fixed‐effects regression for panel data

Dmitry Arkhangelsky, Guido W. Imbens, Lihua Lei and Xiaoman Luo

Quantitative Economics, 2024, vol. 15, issue 4, 999-1034

Abstract: We propose a new estimator for average causal effects of a binary treatment with panel data in settings with general treatment patterns. Our approach augments the popular two‐way‐fixed‐effects specification with unit‐specific weights that arise from a model for the assignment mechanism. We show how to construct these weights in various settings, including the staggered adoption setting, where units opt into the treatment sequentially but permanently. The resulting estimator converges to an average (over units and time) treatment effect under the correct specification of the assignment model, even if the fixed‐ effect model is misspecified. We show that our estimator is more robust than the conventional two‐way estimator: it remains consistent if either the assignment mechanism or the two‐way regression model is correctly specified. In addition, the proposed estimator performs better than the two‐way‐fixed‐effect estimator if the outcome model and assignment mechanism are locally misspecified. This strong robustness property underlines and quantifies the benefits of modeling the assignment process and motivates using our estimator in practice. We also discuss an extension of our estimator to handle dynamic treatment effects.

Date: 2024
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