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st: RE: two-way fixed effects


From   "Johnson, Eric A. (Seattle)" <Eric.Johnson10@va.gov>
To   <statalist@hsphsun2.harvard.edu>
Subject   st: RE: two-way fixed effects
Date   Tue, 24 Jun 2008 15:10:47 -0700

1)
. egen dummy = group(firm year)
. xi: reg quantity price i.dummy

and 2)
. xi: reg quantity price i.firm i.year


These two commands don't generate equivalent design matrixes; the egen
command incorporates interaction effects between firm and year, while
the second model does not include them.  Beyond that, I can't help you:
the use of interaction terms should come from scientific knowledge.  (in
my opinion, of course!)

Hope that helps!
Eric


-----Original Message-----
From: owner-statalist@hsphsun2.harvard.edu
[mailto:owner-statalist@hsphsun2.harvard.edu] On Behalf Of Martin Wang
Sent: Tuesday, June 24, 2008 12:30 PM
To: statalist
Subject: st: two-way fixed effects

Dear Statalist,

I have an old question, which command should I use for two-way fixed
effects? For example if I want to control both year and firm fixed
effects. I find two methods as follows:
1)
. egen dummy = group(firm year)
. xi: reg quantity price i.dummy

and 2)
. xi: reg quantity price i.firm i.year

I find the two methods gave the same estimation of coefficient, but
method 2) seems to yield a large t-stat. Could someone please advise
which one should I use?

Many thanks!

Martin



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