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  • OLS vs. Fixed Effects vs. Random Effects: Equivalence of coeff. & s.e. in case of saturated model (DiD)?

    Hello,

    I am trying to estimate the ATT using individual-level data with 1 pre-treatment and 2 post-treatment periods (T= 0, 1, 2). Based on the regression formulation similar toa two-period DiD approach, I use the following specification for the two post-treatment periods:

    Y_it = a_i + a*Treat_i + t1*Post1_t + t2*Post2_t + d1*(Post1_t * Treat_i) + d2*(Post2_t + Treat_i) + u_it

    Post1 = 1 if in post-treatment period 1
    Post2 = 1 if in post-treatment period 2

    Running
    Code:
    reg y d1 d1 Post1 Post2 Treat
    xtreg y d1 d1 Post1 Post2, fe
    xtreg y d1 d1 Post1 Post2 Treat, re
    yields equivalent coefficients in all three cases and equivalent s.e. for FE and RE (see below):

    Code:
    ---------------------------------------------------------------------------------------------------
              (1)                           (2)                        (3)
              OLS                        FE                        RE
    ---------------------------------------------------------------------------------------------------
    d1       -0.0191 (0.0418)      -0.0191 (0.0355)   -0.0191 (0.0355)
    d2       -0.0574 (0.0418)      -0.0574 (0.0355)   -0.0574 (0.0355)
    a          0.0600* (0.0296)                                        0.0600* (0.0296)
    t1        -0.0233 (0.0280)      -0.0233 (0.0238)   -0.0233 (0.0238)
    t2        -0.0331 (0.0280)      -0.0331 (0.0238)   -0.0331 (0.0238)
    _cons   0.0987*** (0.0198)    0.126*** (0.0125) 0.0987*** (0.0198)
    ---------------------------------------------------------------------------------------------------
    N 1000 1000 1000
    ---------------------------------------------------------------------------------------------------
    Running the same regressions clustering at individual-level (cluster(id)), the coeff. and s.e. in all three cases are equivalent:

    Code:
    ---------------------------------------------------------------------------------------------------
               (1)                               (2)                              (3)
               OLS                            FE                               RE
    ---------------------------------------------------------------------------------------------------
    d1       -0.0191 (0.0349)     -0.0191 (0.0349)     -0.0191 (0.0349)
    d2       -0.0574 (0.0329)     -0.0574 (0.0329)     -0.0574 (0.0329)
    a           0.0600* (0.0300)                                        0.0600* (0.0300)
    t1         -0.0233 (0.0181)     -0.0233 (0.0181)     -0.0233 (0.0181)
    t2         -0.0331 (0.0179)     -0.0331 (0.0178)     -0.0331 (0.0179)
    _cons   0.0987*** (0.0144) 0.126*** (0.0104)   0.0987*** (0.0144)
    ---------------------------------------------------------------------------------------------------
    N 1000 1000 1000
    ---------------------------------------------------------------------------------------------------
    (By adding additional time-varying covariates, the results between the three cases do differ.) However, I am not sure of the correct interpretation.

    1) As I understand, in this specification I am essentially computing first-differences for each post-treatment period. This means that for OLS vs. FE, the coeff. are equivalent because assuming a common intercept (OLS) or individual FE (FE) does not change the coeff.: In both cases the time-invariant variables drop out taking first differences.

    2) Given that the RE is essentially a weighted average between the BE (Between Estimator) and the FE, I do not understand why FE and RE yield the same results? When computing the BE, I get results for d1 and _cons only, due to multicollinearity in the specification (since by exploiting the variation between individuals only, Post1_t, Post2_t and the interactions with Treat_i are multicollinear).

    3) To take into account serial correlation within cluster (for each i over t), I computed cluster-robust s.e. However, I do not understand why the results in all three cases are equivalent.

    Any help is much appreciated.
    Last edited by TimW; 09 Jun 2014, 11:32.
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