Fixed effects
Posted: 17 March 2016 08:41 PM   [ Ignore ]
Total Posts:  1
Joined  2016-03-17

Dear All,

I have the following model

Investment_it=a + b*X_it + c*Treatment_i + d*After_t + e*Treatment_i*After_t + Industry f.e. + error (1)

where “i” is an index for firm, “t” is an index for quarter. “After “is a dummy after 2007. “Treatment” is a dummy for the treated firms and 0 for the control/untreated firms.

Now the variable “Treatment_i” is endogenous and I use 2SLS with an instrumental variable Z_it.

1st stage is:

Treatment_i=a + b* X_it + Z_it +  industry f.e. + error (2)

and using then predicted Treatment_i, I re-estimate (1) .  In 2SLS the set of explanatory variables in (2) must be same as those in (1). My question is that do I need to use the “After” in (2) since it also shows up in (1)?  Thing is that “After” is like

a time fixed effects and Treatment_i is time invariant in (2).  Any feedback is greatly appreciated. thanks!

Posted: 20 March 2016 07:51 PM   [ Ignore ]   [ # 1 ]
Total Posts:  901
Joined  2011-09-19


Is the ‘treatment’ spread over time, or somehow related to years? I can’t be sure, but I can’t think of a reason why adding year dummies (or in this case period indicators) would be a problem. Do you get different results when adding/not adding?




To reply/post new questions: Please use the group WRDS/SAS on Google Groups!