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st: Fixed Effects estimation with time-invariant variables


From   Roman Wörner <h0953997@wu.ac.at>
To   statalist@hsphsun2.harvard.edu
Subject   st: Fixed Effects estimation with time-invariant variables
Date   Fri, 11 Jan 2013 17:59:54 +0100

Dear all,

I am a doctoral student and rather new to STATA and statistics in general. I am thus struggling with a question I hope some of you are familiar with.

My dataset is an unbalanced panel with N=328 and T=8. I plan to used fixed effects models to control for differences between the firms in my sample. I am aware that with fixed effects models one cannot use time-invariant dependent variables. Nevertheless, I've read that it is possible to include time-invariant dependent variables when you interact them with another (time-variant) regressor.

Basically I have three variable of interest: two time-variant variables describing different firm strategies and a time-invariant variable describing the vertical scope (% of value chain steps of the industry the firm is active in; vertical scope takes on the values 0.2, 0.4, 0.6, 0.8, and 1) of the firm. I argue that the relationship of the two strategy-variables depends on the vertical scope of the firm - for focused firms the two strategies are complements, while they are substitutes for firms with a broad scope.

I thus would run the following regression:

StrategyA = b0 + b1*StrategyB + b2*StrategyBXScope + Controls

I expect b1 to be positive and b2 to be negative. If that's the case I would interpret it that way, that an increase in the breadth of the scope reduces the complementarity between the two strategies (I would contrast combinations of StrategyA and StrategyB for different levels of Scope). I am wondering if this combination xtreg, fixed effects, time-variant and time-invariant variables are a valid design and allow for the conclusions I'd like to draw.

I am very grateful for all comments and recommendations.

Many thanks and best regards,

Roman

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