Are fixed effects really fixed?
Image courtesy of the authors: Bias vs. the standard deviation of temporal unobserved heterogeneity where the heterogeneity follows a random walk Podcast-style summary by NotebookLM Academic's take An interesting recent paper titled "Fixed Effects and Causal Inference" by Millimet and Bellemare (2023) discusses the feasibility of assuming fixed effects are fixed over long periods in causal models. The paper highlights the rather obvious but usually overlooked fact that fixed effects may fail to control for unobserved heterogeneity over long time periods. This makes perfect sense, since any effects that are assumed to be fixed (firm characteristics, store attributes, consumer demographics, artistic talent) are more likely to be constant over shorter periods, but may as well vary over longer periods. The paper refers to a critical point made by Mundlak (1978): "It would be unrealistic to assume that the individuals do not change in a differential way as the model...