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ch10-2 - Chapter 10 Regression with Panel Data(Part 2...

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Chapter 10 Regression with Panel Data (Part 2)
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Regression with Time Fixed Effects Fixed effects are not the sole factor that cause omitted variable bias. Consider the effect of automobile safety improvements. This effect would be constant across states, but would evolve over time. As entity fixed effects control for variables that are constant over time but differ across entities , time fixed effects control for variables that are constant across entities but evolve over time . Let S t be the effect of automobile safety the model can be modified to: Y it = β 0 + β 1 X it + β 2 Z i + β 3 S t + u it , S t is unobserved variable.
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Time Fixed Effects Only The time fixed effects regression model with a single X regressor is Y it = β 1 X it + λ t + u it . This model has a different intercept, λ t , for each time period. λ t can be thought as the effect on Y of year t . These λ 1 , ..., λ T are the time fixed effects . The time fixed effects regression model can be represented using T ° 1 dummy variables: Y it = β 0 + β 1 X it + δ 2 B 2
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