Re: st: Can I control for time invariant industry effects and time invariant country effects at the same time?

[David Hoaglin <dchoaglin@gmail.com>]

Chris,

The usual approach would use indicator (or dummy) variables for the
countries and the industries.  You can set up those categorical
variables as factor variables in Stata.  (You didn't mention the
numbers of countries and industries, or whether you may need to
include interactions between country and industry.)

If the joint distribution of countries and industries is reasonably
balanced in your data, those variables should not cause problems with
collinearity.  If they were perfectly balanced, your model would
resemble a two-way analysis of covariance.

Similarly, if the Xct have nontrivial variation across countries and
across time, they should not have collinearity relations with the
country indicators or the time indicators.  Collinearity among the X's
may be a possibility.

In any event, the various coefficients should be straightforward to
interpret.  The country effects are adjusted for the contributions of
time and the X's, the time effects are adjusted for the contributions
of countries and the X's, and the coefficients of the X's are adjusted
for the contributions of countries and time.  The fixed effects will
be relative to (i.e., differences from) the reference country and the
reference year.

David Hoaglin

On Fri, Aug 23, 2013 at 7:42 PM, Christopher Parker
<christopher.parker101@gmail.com> wrote:
> Dear Statalists,
>
> I want to do a regression of the following form:
>
> Ycit= Ac + Bi +Xct
>
> Ycit is my dependent variable, that varies across countries c.,
> industries i, and time t. Ac is a country effect, Bi an industry
> effect and Xct are my explanatory variables that vary across countries
> and time. I want to estimate this with a  normal OLS estimator by
> using dummies.(LSDV approach). To restate, I want include
> timeinvariant industry and country dummies in an OLS-regression. Will
> I have any collinearity issues with this approach, and will the
> coeffecients for the fixed effects be interpretable?
>
> I would be very thankful for your help!
>
> Chris
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