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The PCDID Approach to Treatment Effects Estimation: A Further Investigation

Westerlund, Joakim LU and Bretschneider, Tilman LU (2025) In Journal of Applied Econometrics
Abstract
In the present paper, we study the so-called “PCDID” approach to treatment effects estimation in panels with interactive effects where the factors represent trends whose effect need not be parallel across the cross-sectional units. Our interest in this step-wise approach originates with the observation that the interactive effects are ignored in the first step, which should not be possible without affecting subsequent steps. We confirm that the estimated second-step factors are inconsistent in the empirically relevant scenario where the included covariates are correlated with the true factors. Interestingly enough, though, fixed effects demeaning, which is in theory unnecessary since fixed effects are special interactive effects, is shown... (More)
In the present paper, we study the so-called “PCDID” approach to treatment effects estimation in panels with interactive effects where the factors represent trends whose effect need not be parallel across the cross-sectional units. Our interest in this step-wise approach originates with the observation that the interactive effects are ignored in the first step, which should not be possible without affecting subsequent steps. We confirm that the estimated second-step factors are inconsistent in the empirically relevant scenario where the included covariates are correlated with the true factors. Interestingly enough, though, fixed effects demeaning, which is in theory unnecessary since fixed effects are special interactive effects, is shown to restore consistency of the final-step average treatment effects estimate; however, only under special circumstances. As a general solution to the inconsistency of the estimated factors, we propose an iterated PCDID version. (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:105020968482
ISSN
0883-7252
DOI
10.1002/jae.70022
language
English
LU publication?
yes
id
fabc935d-1a25-4fdb-a813-0c917309a097
date added to LUP
2025-10-01 09:00:42
date last changed
2026-01-13 13:41:18
@article{fabc935d-1a25-4fdb-a813-0c917309a097,
  abstract     = {{In the present paper, we study the so-called “PCDID” approach to treatment effects estimation in panels with interactive effects where the factors represent trends whose effect need not be parallel across the cross-sectional units. Our interest in this step-wise approach originates with the observation that the interactive effects are ignored in the first step, which should not be possible without affecting subsequent steps. We confirm that the estimated second-step factors are inconsistent in the empirically relevant scenario where the included covariates are correlated with the true factors. Interestingly enough, though, fixed effects demeaning, which is in theory unnecessary since fixed effects are special interactive effects, is shown to restore consistency of the final-step average treatment effects estimate; however, only under special circumstances. As a general solution to the inconsistency of the estimated factors, we propose an iterated PCDID version.}},
  author       = {{Westerlund, Joakim and Bretschneider, Tilman}},
  issn         = {{0883-7252}},
  language     = {{eng}},
  publisher    = {{John Wiley & Sons Inc.}},
  series       = {{Journal of Applied Econometrics}},
  title        = {{The PCDID Approach to Treatment Effects Estimation: A Further Investigation}},
  url          = {{http://dx.doi.org/10.1002/jae.70022}},
  doi          = {{10.1002/jae.70022}},
  year         = {{2025}},
}