Imai, Kosuke and In Song Kim. ``On the Use of Two-way Fixed Effects Regression Models for Causal Inference with Panel Data.'' Political Analysis, Forthcoming



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 but 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.

  Related Papers

Imai, Kosuke and In Song Kim. (2019). ``When Should We Use Unit Fixed Effects Regression Models for Causal Inference with Longitudinal Data?'' American Journal of Political Science, Vol. 63, No. 2 (April), pp. 467-490.
Imai, Kosuke, In Song Kim, and Erik Wang. ``Matching Methods for Causal Inference with Time-Series Cross-Sectional Data.''

  Related Software

Kim, In Song and Kosuke Imai. ``wfe: Weighted Linear Fixed Effects Estimators for Causal Inference.'' available through The Comprehensive R Archive Network. 2011-2019.
Kim, In Song, Erik Wang, and Kosuke Imai. ``PanelMatch: Matching Methods for Causal Inference with Time-Series Cross-Section Data.''

© Kosuke Imai
 Last modified: Tue Jun 16 20:17:49 EDT 2020