8 Individual Fixed Effects Regression

Jonathan Wörn
Presentation, data and programs at:
https://bit.ly/3ItnOGj

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 Today’s menu: Fixed effects

• Idea & Examples

• Model & Assumptions
• Syntax, Interpretation, Sample Selection
• Getting the data in shape
• A real world example: Marriage & Happiness
• Concluding remarks

Special thanks to Josef Brüderl at Ludwig-Maximilians-University München.

Parts of this presentation are based on his excellent lecture materials:
https://www.ls3.soziologie.uni-muenchen.de/downloads/downloads_lehre/teaching_materials/panelanalysis-bruederl.pdf

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Idea & Examples

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 Fixed Effects
• A method to get closer to causal estimates with non-
experimental, observational data
• Is change in X associated with change in Y?
• Repeated measures / panel data
• Rules out confounding from time-invariant factors
– Neither observed and unobserved factors

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 Examples

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 Examples

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 Examples

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 Idea
Social participation and depressive symptoms
7

6
Depressive Symptoms

See Brüderl (2015)

0
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6

not treated treated

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 Idea
Social participation and depressive symptoms
7

6
Depressive Symptoms

4 Cross-sectional
regression
3

See Brüderl (2015)

0
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6

not treated treated

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 Idea
Social participation and depressive symptoms
7

6
Depressive Symptoms

4 Fixed effects regression

See Brüderl (2015)

0
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6

not treated treated

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 Why not pooled OLS?
Social participation and depressive symptoms
7

6
Depressive Symptoms

See Brüderl (2015)

0
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6

not treated treated

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Model & Assumptions

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 Model
• Pooled linear regression for panel data

• Biased estimates if

• Step 1: Splitting error into person-specific and time-

specific components…

• … resulting in error components model

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 Model
• … resulting in error components model

• Step 2: Between transformation (person-specific means over time t)

• Step 3: Within transformation = Fixed effect estimate

(error component model – between transformation)

• drops out – no confounding from time constant

factors, even if
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 Assumptions and Requirements
• Standard assumptions (linear regression)
• Loosend exogeneity assumption:
– No correlation of regressors with time-varying confounders:
– Correlation of regressors with time-constant confounders is
no problem: Consistent estimates even if
• Likely violated: Absence of autocorrelation
– Use cluster robust standard errors
(Huber-White sandwich estimator)
– Also helps with heteroskedasticity
• No maturation or period effects
– Add control group. Necessary assumption: parallel trends
• Required: Temporal variation in predictor (and outcome)

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Syntax, Interpretation,
Sample Selection

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 Syntax

• xtreg depvar indepvars, fe vce(cluster id)

– xtreg, fe: FE-model
– vce(cluster id): robust standard errors
– Command requires prior xtset. See „Getting the
data in shape“

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 Interpretation

Observations
Persons

Correlation
regressors and
time constant,
person-specific
error

Stata adds back

a constant

See Hamilton (2005)

sigma_u: standard deviation of the time constant, person-specific error (𝑠𝑖𝑔𝑚𝑎 𝑢)2
sigma_e: standard deviation of the time- and person-specific error 𝑟h𝑜=
(𝑠𝑖𝑔𝑚𝑎 𝑢 )2+(𝑠𝑖𝑔𝑚𝑎 𝑒 )2
rho: fraction of unexplained variance due to differences between units/persons
(intraclass correlation coefficient)
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 Interpretation
• Descriptive interpretation
– After participating in social activities, respondents‘
depressive symptoms are .92 units lower than before
participating in social activities
– Always correct
• Causal interpretation
– Participating in social activities reduces respondents‘
depressive symptoms by .92 units
– Correct if exogeneity assumption holds

See Brüderl (2015)

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 Effect-estimate: only treated units
• Only persons being treated contribute to effect-estimate
– M1: FE with 2 treated persons, 2 non-treated persons
– M2: FE with 2 treated persons
– M3: pooled OLS with 2 treated and 2 non-treated persons

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 Maturation and period effects
Social participation and depressive symptoms
7

6
Depressive Symptoms

0
Year 1 Year 2 Year 3 Year 4 Year 5 Year 6

not treated treated

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 Maturation and period effects
• Coefficients will be biased by
– Time trends
– Age effects
– Period effects
• Wrongly attribute temporal effect to treatment
• Always include time and control group in the model!
– Control group: „at risk“ but not treated
– Assumption: Parallel trends in treatment and control
– If different trends: biased estimates

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 Maturation and period effects

Accounting for time: smaller coefficient for treatment

M1: xtreg depr social, fe vce(cluster id)

M2: xtreg depr social wave, fe vce(cluster id)
M3: xtreg depr social i.wave, fe vce(cluster id)

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 Time constant variables
• Main effects of time-constant variables cannot be
estimated by FE-model
– Not necessary, as confounding is whiped out with
– Not logical to assume that a time constant variable causes a
change in the outcome
• Possible: Interaction time-constant with time-varying
variables
– Does the effect of a time-varying variable differ between
different groups?
– See „A real world example“

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 Sample selection
1. Include only persons who can potentially change
from the state of not being treated to the state of
being treated
– In example: those not participating in social activities (yet)
– When studying effects of marriage: those not (yet) married

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 Sample selection
2. Think carefully how to handle persons that change
to yet another state than treated later on
– In studies of marriage effects:
never married  married  divorce
– Keep?
– Exclude the person completely?
– Exclude only time points (“observations”) while divorced, but
keep while never married and married?
– (substantial considerations)

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 Sample selection
3. Exclude persons with only one observation
– They cannot provide a within estimation

4. Consider including a control group

– Those that are “at risk” / not treated
– AND will not be treated during the observation period
– Allows controlling for time/age

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 Problems not solved by FE-models
• Endogeneity
– reversed causality
– time-varying confounders
– …
• Panel attrition associated with time-variant factors
• Selection into treatment
– Treatment effect on the treated

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Getting the data in shape

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 Data format
panelvar timevar

• Long data format

– Multiple lines per person
– Each line = 1 time point
• xtsetting long data
– xtreg, fe requires xtset
– xtset panelvar timevar
[, options]

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 Digression:
Transforming wide to long format

. reshape long depr social, i(id) j(wave)

(note: j = 1 2 3 4 5 6)

Data wide -> long

Number of obs. 4 -> 24

Number of variables 13 -> 4
j variable (6 values) -> wave
xij variables:
depr1 depr2 ... depr6 -> depr
social1 social2 ... social6 -> social

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 Describing xtset-data
• Describe transitions between statuses:
xttrans varname [, freq]

freq-option gives numbers in addition to percentages

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 Describing xtset-data
• Describe variables: xtsum varlist

Varies only
between persons

Varies only
within persons

“Enough” within-
variation in treatment?

More info about xtsum and its interpretation: https://www.stata.com/manuals/xtxtsum.pdf

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 Describing xtset-data
• Tabulate variables: xttab varlist

Observation/timepoint-level Unit/person-level

• Also: distinct-command
to identify IDs with
certain features

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 Describing xtset-data

• Useful for patterns of missingness:

xtdescribe [, width(#) patterns(#)]
– Width of participation patterns (default: 100)
– Patterns: maximum number of patterns (default: 9)

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Useful commands for long data

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 Useful commands for long data
• bysort: repeat command on subsets
– Sort and execute for each id and each wave:
bysort id wave
– Sort by id and wave, but execute by id:
bysort id (wave)
• Counting:
– Running count: gen run = _n
– Overall count: gen count = _N
• egen: extensions to generate
– egen newvar = fcn(arguments) [, options]
– fcn: min(exp), max(exp), and many more

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 Useful commands for long data
• Powerful combinations:
– bysort id (wave) : gen round = _n (each person: number rows in correct order)
– bysort id : gen total = _N (each person: how many rows)

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 Useful commands for long data
Goal: Finding first treatment, after treatment, ever treated

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 Useful commands for long data
Goal: Finding first treatment, after first treatment, ever treated

1. First treatment:
– bysort id (wave) :
gen first_social = sum(social == 1) == 1 & sum(social[_n - 1] == 1) == 0
Is 1 if condition is true: social is 1 in row _n and is not 1 in row _n-1
Is 0 otherwise.

2. After first treatment

– bysort id (wave) : gen after_social = sum(first_social)
Running sum of first_social up until wave _n, for person i

3. Tagging all observations of persons ever treated

Finds the maximum of social (0 or 1) for each person
– bysort id : egen ever_social = max(social)

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A real world example:
Marriage & Happiness

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 A real world example
• Does marriage make happy?
• Based on a 50%-subsample from the German Family Panel
– 11 waves (2009-2019)
– 12.000 respondents, plus their partners, children, and parents
– Born 1971-73, 1981-83, 1991-93 und 2001-03
– https://www.pairfam.de/
• Log-file with syntax and output is available on course homepage
• For data access: Fill in data access form and send to me:
– https://www.pairfam.de/fileadmin/user_upload/uploads/Covid-19/
Antragsformular/DistributionTeachingVersion_pairfam11.0
_COVID-19_en.pdf

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 Interaction with constant variables

Effect of married when

male == 0 (i.e., for women)

Not estimated b/c

constant over time
DIFFERENCE in effect of married
between men vs. women (n.s.).
Effect of being married for men:
0.0268+(-0.0383)=-0.0114

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 Impact functions using dummies

Controlling for wave-dummies Not controlling for wave-dummies

• Dummy variables indicating years since marriage

– Factor-notation in Stata
– Set variable „years since marriage“ to a constant value (e.g. 10000) instead
of missing  included in model as control group
• Plot: coefplot-ado
• See 9-fixed-effects-regression_example.do / .smcl

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 Impact functions using dummies

• See 9-fixed-effects-regression_example.do / .smcl

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Concluding remarks

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 Application to other data structures
• Applicable to other panel data structures
– Children in families
– Children in schools
– Areas within countries
– …
• Model will exploit the variation within…
– families (different children)
– schools (different children)
– countries (different areas)
– …
– … and whipe out specifics of families, schools, countries, etc

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 Summary individual fixed effects

• Approaching causality with panel data

• Uses within-variation
• Controls time-constant factors
• xtset and xtreg, fe vce(cluster id)
• Model
– Include those not treated at outset
– Include control group and control for time

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 References

Allison, P.D. (2009). Fixed effects regression models. SAGE Publications,

doi.org/10.4135/9781412993869
Best, H., & Wolf, C. (Eds.) (2014). The SAGE handbook of regression analysis and causal
inference. SAGE Publications, doi.org/10.4135/9781446288146
Brüderl, J. (2015). Applied Panel Data Analysis Using STATA. Course Material, available at
https://www.ls3.soziologie.uni-muenchen.de/downloads/downloads_lehre/teaching_materials/pa
nelanalysis-bruederl.pdf
Gould, W.G. (n.d.). How can there be an intercept in the fixed-effects model estimated by xtreg,
fe?, available at https://www.stata.com/support/faqs/statistics/intercept-in-fixed-effects-model/
Gunasekara, F.I., K. Richardson, K. Carter, T. Blakely. Fixed effects analysis of repeated
measures data, International Journal of Epidemiology, Volume 43, Issue 1, February 2014,
Pages 264–269, https://doi.org/10.1093/ije/dyt221
Hamilton, L.C. (2005). Statistics with STATA. Thomson, Belmont.
Torres-Reyna, O. (2007). Panel Data Analysis Fixed and Random Effects using Stata. Course
Material available at https://www.princeton.edu/~otorres/Panel101.pdf
Wooldridge, J.M. (2009). Introductory Econometrics: A Modern Approach. South-Western.
ISBN: 9780324581621

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