On the Use of Two-Way Fixed Effects Regression Models for Causal Inference with Panel Data

Kosuke Imai and In Song Kim

Political Analysis, 2021, vol. 29, issue 3, 405-415

Abstract: The two-way linear fixed effects regression (2FE) has become a default method for estimating causal effects from panel data. Many applied researchers use the 2FE estimator to adjust for unobserved unit-specific and time-specific confounders at the same time. Unfortunately, we demonstrate that the ability of the 2FE model to simultaneously adjust for these two types of unobserved confounders critically relies upon the assumption of linear additive effects. Another common justification for the use of the 2FE estimator is based on its equivalence to the difference-in-differences estimator under the simplest setting with two groups and two time periods. We show that this equivalence does not hold under more general settings commonly encountered in applied research. Instead, we prove that the multi-period difference-in-differences estimator is equivalent to the weighted 2FE estimator with some observations having negative weights. These analytical results imply that in contrast to the popular belief, the 2FE estimator does not represent a design-based, nonparametric estimation strategy for causal inference. Instead, its validity fundamentally rests on the modeling assumptions.

Date: 2021
References: Add references at CitEc
Citations: View citations in EconPapers (96)

Downloads: (external link)
https://www.cambridge.org/core/product/identifier/ ... type/journal_article link to article abstract page (text/html)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:cup:polals:v:29:y:2021:i:3:p:405-415_8

Access Statistics for this article

More articles in Political Analysis from Cambridge University Press Cambridge University Press, UPH, Shaftesbury Road, Cambridge CB2 8BS UK.
Bibliographic data for series maintained by Kirk Stebbing ().