Question

What is a fixed effects model?

Answer 1

Fixed effects models work to remove omitted variable bias by measuring change within a group. By measuring within a group (across time) you control for a number of potential omitted variables unique to the group.

Explanation:

Fixed effects models work to remove omitted variable bias by measuring change within a group. By measuring within a group (across time) you control for a number of potential omitted variables unique to the group.

Assumptions
- Fixed Effects assumes that the individual specific effect is correlated to the independent variable.

Why would you use a Fixed Effects Model?
Controlling for unobserved heterogeneity when heterogeneity is constant over time and correlated with independent variables. When there are certain non-random characteristics you don’t want ending up in your error term.