A Linear Panel Model with Heterogeneous Coefficients and Variation in Exposure

Liyang Sun and Jesse Shapiro

Journal of Economic Perspectives, 2022, vol. 36, issue 4, 193-204

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.

JEL-codes: C23 H51 I13 I18 J14 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (9)

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Working Paper: A Linear Panel Model with Heterogeneous Coefficients and Variation in Exposure (2022)
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DOI: 10.1257/jep.36.4.193

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