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Direct and Indirect Treatment Effects with Time-Varying Covariates

Brown, Nicholas ; Butts, Kyle and Westerlund, Joakim LU (2026) In Journal of Applied Econometrics
Abstract
We propose a simple approach to treatment effect estimation in panel data that is valid when the number of time periods is small and the parallel trends condition is violated due to the presence of interactive fixed effects. The procedure allows the covariates to be affected by treatment and enables separation of the part of the estimated treatment effect that is due to the covariates from the part that is not. The asymptotic properties of the new approach are established, and their accuracy in small samples is investigated using Monte Carlo simulations. The procedure is illustrated using as an example the effect of increased trade competition on firm markups in China. We estimate that about half of the impact of China's entrance into the... (More)
We propose a simple approach to treatment effect estimation in panel data that is valid when the number of time periods is small and the parallel trends condition is violated due to the presence of interactive fixed effects. The procedure allows the covariates to be affected by treatment and enables separation of the part of the estimated treatment effect that is due to the covariates from the part that is not. The asymptotic properties of the new approach are established, and their accuracy in small samples is investigated using Monte Carlo simulations. The procedure is illustrated using as an example the effect of increased trade competition on firm markups in China. We estimate that about half of the impact of China's entrance into the WTO on markup dispersion came from the changes in industry-level productivity. (Less)
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author
; and
organization
publishing date
type
Contribution to journal
publication status
epub
subject
in
Journal of Applied Econometrics
publisher
John Wiley & Sons Inc.
external identifiers
  • scopus:105036409886
ISSN
0883-7252
DOI
10.1002/jae.70055
language
English
LU publication?
yes
id
16d3008d-a719-4dfd-ba79-1c4ed77c7eb9
date added to LUP
2026-02-22 16:03:39
date last changed
2026-06-23 14:48:18
@article{16d3008d-a719-4dfd-ba79-1c4ed77c7eb9,
  abstract     = {{We propose a simple approach to treatment effect estimation in panel data that is valid when the number of time periods is small and the parallel trends condition is violated due to the presence of interactive fixed effects. The procedure allows the covariates to be affected by treatment and enables separation of the part of the estimated treatment effect that is due to the covariates from the part that is not. The asymptotic properties of the new approach are established, and their accuracy in small samples is investigated using Monte Carlo simulations. The procedure is illustrated using as an example the effect of increased trade competition on firm markups in China. We estimate that about half of the impact of China's entrance into the WTO on markup dispersion came from the changes in industry-level productivity.}},
  author       = {{Brown, Nicholas and Butts, Kyle and Westerlund, Joakim}},
  issn         = {{0883-7252}},
  language     = {{eng}},
  publisher    = {{John Wiley & Sons Inc.}},
  series       = {{Journal of Applied Econometrics}},
  title        = {{Direct and Indirect Treatment Effects with Time-Varying Covariates}},
  url          = {{http://dx.doi.org/10.1002/jae.70055}},
  doi          = {{10.1002/jae.70055}},
  year         = {{2026}},
}