Fixed Effects and Causal Inference

51 Pages Posted: 3 Jun 2023

See all articles by Daniel Millimet

Daniel Millimet

Southern Methodist University (SMU) - Department of Economics

Marc F. Bellemare

University of Minnesota - Twin Cities - Department of Applied Economics

Abstract

Across many disciplines, the fixed effects estimator of linear panel data models is the default method to estimate causal effects with nonexperimental data that are not confounded by time-invariant, unit-specific heterogeneity. One feature of the fixed effects estimator, however, is often overlooked in practice: With data over time t ∈ {1,...,T} for each unit of observation i ∈ {1,...,N}, the amount of unobserved heterogeneity the researcher can remove with unit fixed effects is weakly decreasing in T. Put differently, the set of attributes that are time-invariant is not invariant to the length of the panel. We consider several alternatives to the fixed effects estimator with T > 2 when relevant unit-specific heterogeneity is not time-invariant, including existing estimators such as the first-difference, twice first-differenced, and interactive fixed effects estimators. We also introduce several novel algorithms based on rolling estimators. In the situations considered here, there is little to be gained and much to lose by using the fixed effects estimator. We recommend reporting the results from multiple linear panel data estimators in applied research.

Keywords: panel data, fixed effects, first-differences, interactive fixed effects, unobserved heterogeneity, time-varying individual effects

JEL Classification: C23, C51, C52

Suggested Citation

Millimet, Daniel and Bellemare, Marc F., Fixed Effects and Causal Inference. IZA Discussion Paper No. 16202, Available at SSRN: https://ssrn.com/abstract=4467963 or http://dx.doi.org/10.2139/ssrn.4467963

Daniel Millimet (Contact Author)

Southern Methodist University (SMU) - Department of Economics ( email )

Dallas, TX 75275
United States

Marc F. Bellemare

University of Minnesota - Twin Cities - Department of Applied Economics ( email )

MN
United States

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
292
Abstract Views
1,035
Rank
208,201
PlumX Metrics