Primary Submission Category: Event Studies
Anatomy of Two-Way Fixed Effects Models: Experimental Design Principles, Use of Information, and Robust Estimation
Authors: Zhu Shen, Yuzhou Lin, Ambarish Chattopadhyay, Jose Zubizarreta,
Presenting Author: Zhu Shen*
In recent decades, event studies have emerged as a leading methodology in health and social research for evaluating the causal effects of discrete interventions. In this paper, we provide a novel characterization of the classical dynamic two-way fixed effects (TWFE) regression estimator for event studies. Our decomposition is expressed in closed-form and reveals, in finite samples and without approximations, the hypothetical experiment that TWFE regression adjustments approximate. This decomposition offers insights into how standard regression estimators use information from various units and time points, generalizing the notion of forbidden comparison noted in the literature in simpler settings. We propose a robust weighting approach for estimation in event studies, which allows investigators to progressively build larger valid weighted contrasts by leveraging, in a sequential manner, increasingly stronger assumptions on the potential outcomes and the assignment mechanism. We provide weighting diagnostics and visualization tools. We illustrate these methods in a case study of the impact of divorce reforms on female suicide.