Hi everyone,

I have a question about the difference-in-differences (DID) model with fixed effects.

According to my understanding there are two kinds of DID model:

1) Y=a

2) Y=a

Here TREAT is an indicator variable that represent a group of firms that will be affected by a policy.

POST represent the periods when the policy was introduced.

TREAT_POST=1 for the TREAT firms in the POST period.

According to my understanding, Model 2 is better if there are possible omitted time-invariant and time-specific variables.

I also know that in Model 2 TREAT and POST indicator variables should usually be dropped.

(please correct me if I'm wrong)

However, I find that I can actually run regression with:

Y=a

Stata didn't report any warnings about collinearity problem, and the coefficients a

So my questions are:

1) Should we always drop the TREAT and POST if fixed effects are included?

2) How to explain the coefficients on TREAT and POST when fixed effects are included?

In my case, I have 206 TREAT firms and 53 CONTROL firms, 2 pre-year and 2 post-year.

I'm using Stata 14.0.

Thanks a lot!!!

Best,

Yiting

I have a question about the difference-in-differences (DID) model with fixed effects.

According to my understanding there are two kinds of DID model:

1) Y=a

_{0}+a_{1}*TREAT+a_{2}*POST+a_{3}*TREAT_POST+e2) Y=a

_{0}+a_{1}*TREAT_POST+time fixed effects+firm fixed effectsHere TREAT is an indicator variable that represent a group of firms that will be affected by a policy.

POST represent the periods when the policy was introduced.

TREAT_POST=1 for the TREAT firms in the POST period.

According to my understanding, Model 2 is better if there are possible omitted time-invariant and time-specific variables.

I also know that in Model 2 TREAT and POST indicator variables should usually be dropped.

(please correct me if I'm wrong)

However, I find that I can actually run regression with:

Y=a

_{0}+a_{1}*TREAT+a_{2}*POST+a_{3}*TREAT_POST+firm and time fixed effectsStata didn't report any warnings about collinearity problem, and the coefficients a

_{1}and a_{2}are both significant with reasonable signs.So my questions are:

1) Should we always drop the TREAT and POST if fixed effects are included?

2) How to explain the coefficients on TREAT and POST when fixed effects are included?

In my case, I have 206 TREAT firms and 53 CONTROL firms, 2 pre-year and 2 post-year.

I'm using Stata 14.0.

Thanks a lot!!!

Best,

Yiting

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