Scandinavian Working Papers in Economics

Memorandum,
Oslo University, Department of Economics

No 21/2014: Practical Correlation Bias Correction in Two-way Fixed Effects Linear Regression

Simen Gaure ()
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Simen Gaure: The Ragnar Frisch Centre for Economic Research, Oslo, Norway

Abstract: When doing two-way fixed effects OLS estimations, both the variances and covariance of the fixed effects are biased. A formula for a bias correction is known, but in large datasets it involves inverses of impractically large matrices. We detail how to compute the bias correction in this case.

Keywords: Limited mobility bias; Two way fuxed effects; Linear regression

JEL-codes: A19; C13; C33; C50; C87

11 pages, August 30, 2014

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