Fixed Effects estimation When there is an observed fixed effect. an alternative to first differences is fixed effects estimation ◆C onsider the average over time of vit Bxm+…+ Brink+a1+un o The average of a, will be a;, so if you subtract the mean a will be differenced out just as when doing first differences Economics 20- Prof andersonEconomics 20 - Prof. Anderson 1 Fixed Effects Estimation When there is an observed fixed effect, an alternative to first differences is fixed effects estimation Consider the average over time of yit = b1 xit1 +…+ bk xitk + ai + uit The average of ai will be ai , so if you subtract the mean, ai will be differenced out just as when doing first differences