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An Algorithm to Estimate the Two-Way Fixed Effects Model

Author

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  • Somaini Paulo

    () (Department of Economics, MIT, Cambridge, MA, USA)

  • Wolak Frank A.

    (Department of Economics, Stanford University, Stanford, CA, USA)

Abstract

We present an algorithm to estimate the two-way fixed effect linear model. The algorithm relies on the Frisch-Waugh-Lovell theorem and applies to ordinary least squares (OLS), two-stage least squares (TSLS) and generalized method of moments (GMM) estimators. The coefficients of interest are computed using the residuals from the projection of all variables on the two sets of fixed effects. Our algorithm has three desirable features. First, it manages memory and computational resources efficiently which speeds up the computation of the estimates. Second, it allows the researcher to estimate multiple specifications using the same set of fixed effects at a very low computational cost. Third, the asymptotic variance of the parameters of interest can be consistently estimated using standard routines on the residualized data.

Suggested Citation

  • Somaini Paulo & Wolak Frank A., 2016. "An Algorithm to Estimate the Two-Way Fixed Effects Model," Journal of Econometric Methods, De Gruyter, vol. 5(1), pages 143-152, January.
    • Handle: RePEc:bpj:jecome:v:5:y:2016:i:1:p:143-152:n:4
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    References listed on IDEAS

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    1. Cornelissen, Thomas, 2008. "The Stata command felsdvreg to fit a linear model with two high–dimensional fixed effects," Stata Journal, StataCorp LP, vol. 8(2), pages 1-20.
    2. Sergio Correia, 2014. "REGHDFE: Stata module to perform linear or instrumental-variable regression absorbing any number of high-dimensional fixed effects," Statistical Software Components S457874, Boston College Department of Economics, revised 18 Nov 2019.
    3. John M. Abowd & Francis Kramarz & David N. Margolis, 1999. "High Wage Workers and High Wage Firms," Econometrica, Econometric Society, vol. 67(2), pages 251-334, March.
    4. repec:ags:stataj:163398 is not listed on IDEAS
    5. Amine Ouazad, 2008. "A2REG: Stata module to estimate models with two fixed effects," Statistical Software Components S456942, Boston College Department of Economics.
    6. Guimarães, Paulo & Portugal, Pedro, 2010. "A simple feasible procedure to fit models with high-dimensional fixed effects," Stata Journal, StataCorp LP, vol. 10(4), pages 1-22.
    7. Jeffrey M Wooldridge, 2010. "Econometric Analysis of Cross Section and Panel Data," MIT Press Books, The MIT Press, edition 2, volume 1, number 0262232588.
    8. Anabela Carneiro & Paulo Guimarães & Pedro Portugal, 2012. "Real Wages and the Business Cycle: Accounting for Worker, Firm, and Job Title Heterogeneity," American Economic Journal: Macroeconomics, American Economic Association, vol. 4(2), pages 133-152, April.
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    Cited by:

    1. Frank R. LICHTENBERG, 2018. "The Impact of New Drug Launch on Life-Years Lost in 2015 from 19 Types of Cancer in 36 Countries," JODE - Journal of Demographic Economics, Cambridge University Press, vol. 84(3), pages 309-354, September.
    2. repec:eee:pubeco:v:175:y:2019:i:c:p:94-118 is not listed on IDEAS

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