IDEAS home Printed from https://ideas.repec.org/p/arx/papers/2503.05125.html
   My bibliography  Save this paper

When can we get away with using the two-way fixed effects regression?

Author

Listed:
  • Apoorva Lal

Abstract

The use of the two-way fixed effects regression in empirical social science was historically motivated by folk wisdom that it uncovers the Average Treatment effect on the Treated (ATT) as in the canonical two-period two-group case. This belief has come under scrutiny recently due to recent results in applied econometrics showing that it fails to uncover meaningful averages of heterogeneous treatment effects in the presence of effect heterogeneity over time and across adoption cohorts, and several heterogeneity-robust alternatives have been proposed. However, these estimators often have higher variance and are therefore under-powered for many applications, which poses a bias-variance tradeoff that is challenging for researchers to navigate. In this paper, we propose simple tests of linear restrictions that can be used to test for differences in dynamic treatment effects over cohorts, which allows us to test for when the two-way fixed effects regression is likely to yield biased estimates of the ATT. These tests are implemented as methods in the pyfixest python library.

Suggested Citation

  • Apoorva Lal, 2025. "When can we get away with using the two-way fixed effects regression?," Papers 2503.05125, arXiv.org.
    • Handle: RePEc:arx:papers:2503.05125
    as

    Download full text from publisher

    File URL: http://arxiv.org/pdf/2503.05125
    File Function: Latest version
    Download Restriction: no
    ---><---

    References listed on IDEAS

    as
    1. Peng Ding & Avi Feller & Luke Miratrix, 2019. "Decomposing Treatment Effect Variation," Journal of the American Statistical Association, Taylor & Francis Journals, vol. 114(525), pages 304-317, January.
    2. Paul Goldsmith-Pinkham & Peter Hull & Michal Kolesár, 2022. "Contamination Bias in Linear Regressions," Working Papers 2022-15, Princeton University. Economics Department..
    3. Paul Goldsmith-Pinkham & Peter Hull & Michal Kolesár, 2024. "Contamination Bias in Linear Regressions," American Economic Review, American Economic Association, vol. 114(12), pages 4015-4051, December.
    4. Ashesh Rambachan & Jonathan Roth, 2023. "A More Credible Approach to Parallel Trends," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 90(5), pages 2555-2591.
    5. repec:osf:osfxxx:bqmws_v1 is not listed on IDEAS
    6. Sun, Liyang & Abraham, Sarah, 2021. "Estimating dynamic treatment effects in event studies with heterogeneous treatment effects," Journal of Econometrics, Elsevier, vol. 225(2), pages 175-199.
    7. Callaway, Brantly & Sant’Anna, Pedro H.C., 2021. "Difference-in-Differences with multiple time periods," Journal of Econometrics, Elsevier, vol. 225(2), pages 200-230.
    8. Weiss, Amanda, 2024. "How Much Should We Trust Modern Difference-in-Differences Estimates?," OSF Preprints bqmws, Center for Open Science.
    9. Dmitry Arkhangelsky & Guido Imbens, 2023. "Causal Models for Longitudinal and Panel Data: A Survey," NBER Working Papers 31942, National Bureau of Economic Research, Inc.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Bernardus F Nazar Van Doornik & Armando Gomes & David Schoenherr & Janis Skrastins, 2023. "Financial access and labor market outcomes: evidence from credit lotteries," BIS Working Papers 1071, Bank for International Settlements.
    2. Francesco Ruggieri, 2023. "Dynamic Regression Discontinuity: An Event-Study Approach," Papers 2307.14203, arXiv.org, revised Mar 2025.
    3. Bhuller, Manudeep & Sigstad, Henrik, 2024. "2SLS with multiple treatments," Journal of Econometrics, Elsevier, vol. 242(1).
    4. Bernardus van Doornik & Dimas Fazio & Tarun Ramadorai & Janis Skrastins, 2024. "Housing and Fertility," Working Papers Series 612, Central Bank of Brazil, Research Department.
    5. Jean-Baptiste Bonnier, 2024. "A Split-Treatment Design," Working Papers 2024-11, CRESE.
    6. Matthewes, Sonke & Borgna, Camilla, 2025. "De-tracking at the margin: how alternative secondary education pathways affect student attainment," LSE Research Online Documents on Economics 126595, London School of Economics and Political Science, LSE Library.
    7. Arne Henningsen & Guy Low & David Wuepper & Tobias Dalhaus & Hugo Storm & Dagim Belay & Stefan Hirsch, 2024. "Estimating Causal Effects with Observational Data: Guidelines for Agricultural and Applied Economists," IFRO Working Paper 2024/03, University of Copenhagen, Department of Food and Resource Economics.
    8. Ben Deaner & Chen-Wei Hsiang & Andrei Zeleneev, 2025. "Inferring Treatment Effects in Large Panels by Uncovering Latent Similarities," Papers 2503.20769, arXiv.org, revised Mar 2025.
    9. Li, Daiyue & Jin, Yanhong & Cheng, Mingwang, 2024. "Unleashing the power of industrial robotics on firm productivity: Evidence from China," Journal of Economic Behavior & Organization, Elsevier, vol. 224(C), pages 500-520.
    10. Kirill Borusyak & Xavier Jaravel & Jann Spiess, 2024. "Revisiting Event-Study Designs: Robust and Efficient Estimation," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 91(6), pages 3253-3285.
    11. Nilsen, Øivind A. & Raknerud, Arvid, 2024. "Dynamics of first-time patenting firms," Research Policy, Elsevier, vol. 53(8).
    12. Philipp Barteska & Jay Euijung Lee, 2024. "Bureaucrats and the Korean export miracle," Discussion Papers 2024-11, Nottingham Interdisciplinary Centre for Economic and Political Research (NICEP).
    13. Isabelle Chort & Berk Öktem, 2024. "Agricultural shocks, coping policies and deforestation: Evidence from the coffee leaf rust epidemic in Mexico," American Journal of Agricultural Economics, John Wiley & Sons, vol. 106(3), pages 1020-1057, May.
    14. Peter Hull & Michal Kolesár & Christopher Walters, 2022. "Labor by design: contributions of David Card, Joshua Angrist, and Guido Imbens," Scandinavian Journal of Economics, Wiley Blackwell, vol. 124(3), pages 603-645, July.
    15. Francesconi, Marco & Sonedda, Daniela, 2024. "Does Weaker Employment Protection Lower the Cost of Job Loss?," IZA Discussion Papers 17374, Institute of Labor Economics (IZA).
    16. Jason Semprini, 2023. "Medicaid expansions and private insurance “crowd‐out” (1999–2019)," Social Science Quarterly, Southwestern Social Science Association, vol. 104(7), pages 1329-1342, December.
    17. Adamson Bryant, 2025. "Place-Based Policies for Neighborhood Improvement: Evidence from Promise Zones," Papers 2503.05946, arXiv.org.
    18. Andrea Mattozzi & Samuel Nocito & Francesco Sobbrio, 2022. "Fact-Checking Politicians," CESifo Working Paper Series 10122, CESifo.
    19. M. V. Lee Badgett & Christopher S. Carpenter & Maxine J. Lee & Dario Sansone, 2025. "A review of the effects of legal access to same‐sex marriage," Journal of Policy Analysis and Management, John Wiley & Sons, Ltd., vol. 44(1), pages 266-294, January.
    20. Gregory Faletto, 2023. "Fused Extended Two-Way Fixed Effects for Difference-in-Differences With Staggered Adoptions," Papers 2312.05985, arXiv.org, revised Apr 2025.

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:arx:papers:2503.05125. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: arXiv administrators (email available below). General contact details of provider: http://arxiv.org/ .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.