Public Economics Lectures Part 1: Introduction

Fixed Effects
Include time and state dummies as a way of solving this problem:
P jt = α + γ t + δ j + βT jt + ɛ jt
Fixed effect regression is equivalent to partial regression
ˆP jt = β ˆT jt + ɛ jt
where ˆP jt = P jt − P j − P t and ̂T jt is defined analogously
Identification obtained from within-state variation over time
Note: common changes that apply to all groups (e.g. fed tax change)
captured by time dummy; not a source of variation that identifies β
Public Economics Lectures () Part 2: Tax Incidence 49 / 142