I am trying to figure out whether or not it is appropriate to use
two-way fixed effects given the data I am currently using.
My dataset consists of 150 firms with single yearly observations for
each firm from 1990 to 2005. The primary independent variable of
interest is a binary variable. Thus, for any given year, Firm A (or
any other firm in the set) will only have a single observation. I was
originally using a yearly fixed effect and clustering by firm.
However, at a recent conference I was told that I may need to use
two-way fixed effects (i.e. a year and firm fixed effect) instead of
clustering.
I have discussed this with a number of people and some have told me
that this is appropriate, while others have told me that I cannot use
two-way fixed effects with only a single observation for each firm in
each year. The two different methods give me very different results.
Can someone please tell me whether it is or is not appropriate to use
two-way fixed effects given my data?
Any response would be greatly appreciated.
Thanks,
Samuel
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