Extended two-way fixed effects

Estimates an "extended" two-way fixed effects regression, with fully saturated interaction effects a la Wooldridge (2023, 2025). At its heart, etwfe is a convenience function that automates a number of tedious and error prone preparation steps involving both the data and model formulae. Computation is passed on to the feols (linear) / feglm (nonlinear) functions from the fixest package. etwfe should be paired with its companion emfx function.

Usage

etwfe(
  fml = NULL,
  tvar = NULL,
  gvar = NULL,
  data = NULL,
  ivar = NULL,
  xvar = NULL,
  tref = NULL,
  gref = NULL,
  cgroup = c("notyet", "never"),
  fe = NULL,
  family = NULL,
  ...
)

Arguments

fml: A two-side formula representing the outcome (lhs) and any control variables (rhs), e.g. y ~ x1 + x2. If no controls are required, the rhs must take the value of 0 or 1, e.g. y ~ 0.
tvar: Time variable. Can be a string (e.g., "year") or an expression (e.g., year).
gvar: Group variable. Can be either a string (e.g., "first_treated") or an expression (e.g., first_treated). In a staggered treatment setting, the group variable typically denotes treatment cohort.
data: The data frame that you want to run ETWFE on.
ivar: Optional index variable. Can be a string (e.g., "country") or an expression (e.g., country). Leaving as NULL (the default) will result in group-level fixed effects being used, which is more efficient and necessary for nonlinear models (see family argument below). However, you may still want to cluster your standard errors by your index variable through the vcov argument. See Examples below.
xvar: Optional interacted categorical covariate for estimating heterogeneous treatment effects. Enables recovery of the marginal treatment effect for distinct levels of xvar, e.g. "child", "teenager", or "adult". Note that the "x" prefix in "xvar" represents a covariate that is interacted with treatment, as opposed to a regular control variable.
tref: Optional reference value for tvar. Defaults to its minimum value (i.e., the first time period observed in the dataset).
gref: Optional reference value for gvar. You shouldn't need to provide this if your gvar variable is well specified. But providing an explicit reference value can be useful/necessary if the desired control group takes an unusual value.
cgroup: What control group do you wish to use for estimating treatment effects. Either "notyet" treated (the default) or "never" treated.
fe: What category of fixed effects should be used? One of either "vs" (varying slopes), "feo" (fixed effects only), or "none" (no fixed effects whatsoever). If left as NULL (i.e., no explicit choice) then will default to "vs" for linear/Gaussian models, since this is the most efficient estimation option and further limits the number of "nuisance" parameters in the return model object. However, for non-Gaussian families will default to "none", since the downstream emfx function cannot compute standard errors for these models in the presence of fixed-effects. (See: https://github.com/vincentarelbundock/marginaleffects/issues/1487) Please note that the primary treatment parameters of interest should remain unchanged regardless of fe argument choice.
family: Which family to use for the estimation. Defaults to NULL, in which case fixest::feols is used. Otherwise passed to fixest::feglm, so that valid entries include "logit", "poisson", and "negbin". Note that if a non-NULL family entry is detected, ivar will automatically be set to NULL.
...: Additional arguments passed to fixest::feols (or fixest::feglm). The most common example would be a vcov argument. Note that incomplete cases are dropped before any controls (or xvar) are demeaned, but only for variables in fml, the gvar, tvar, ivar and xvar arguments, and one-sided formula weights (e.g., weights = ~pop). Other sample restrictions passed here (e.g., subset, or vector weights with missing values) are applied by feols after demeaning, so you should remove the affected rows from data beforehand.

Value

A fixest object with fully saturated interaction effects, and a few additional attributes used for post-estimation in emfx.

Heterogeneous treatment effects

Specifying etwfe(..., xvar = <xvar>) will generate interaction effects for all levels of <xvar> as part of the main regression model. The reason that this is useful (as opposed to a regular, non-interacted covariate in the formula RHS) is that it allows us to estimate heterogeneous treatment effects as part of the larger ETWFE framework. Specifically, we can recover heterogeneous treatment effects for each level of <xvar> by passing the resulting etwfe model object on to emfx().

For example, imagine that we have a categorical variable called "age" in our dataset, with two distinct levels "adult" and "child". Running emfx(etwfe(..., xvar = age)) will tell us how the efficacy of treatment varies across adults and children. We can then also leverage the in-built hypothesis testing infrastructure of marginaleffects to test whether the treatment effect is statistically different across these two age groups; see Examples below. Note the same principles carry over to categorical variables with multiple levels, or even continuous variables (although continuous variables are not as well supported yet).

Performance

Both etwfe and emfx should be fast, even for large datasets. In particular, as of etwfe v0.7.0, emfx is orders of magnitude faster than it used to be, because it now computes standard errors using exact analytic Jacobians. (Earlier versions relied on a numerical delta method, which required estimating two prediction models for each coefficient in the model.)

References

Wooldridge, Jeffrey M. (2025). Two-way fixed effects, the two-way Mundlak regression, and difference-in-differences estimators. Empirical Economics, 69, 2545-2587. Available: https://doi.org/10.1007/s00181-025-02807-z

Wooldridge, Jeffrey M. (2023). Simple Approaches to Nonlinear Difference-in-Differences with Panel Data. The Econometrics Journal, 26(3), C31-C66. Available: https://doi.org/10.1093/ectj/utad016

Examples

# We'll use the base_stagg dataset from the fixest package, which simulates a
# staggered treatment rollout across 100 units over 10 years. Never-treated
# units have `year_treated = 10000`.
data("base_stagg", package = "fixest")

#
# Basic example
#

# The basic ETWFE workflow involves two consecutive function calls:
# 1) `etwfe` and 2) `emfx`

# 1) `etwfe`: Estimate a regression model with saturated interaction terms.
mod = etwfe(
  fml  = y ~ x1,       # outcome ~ controls (use 0 or 1 if none)
  tvar = year,         # time variable
  gvar = year_treated, # group variable
  data = base_stagg,   # dataset
  vcov = ~id           # vcov adjustment (here: clustered by unit)
  )

# mod ## A fixest model object with fully saturated interaction effects.

# 2) `emfx`: Recover the treatment effects of interest.

(mod_es = emfx(mod, type = "event")) # dynamic ATE a la an event study
#> 
#>  event Estimate Std. Error      z Pr(>|z|)     S  2.5 %  97.5 %
#>      0   -5.195      0.351 -14.79   <0.001 162.0 -5.884 -4.5070
#>      1   -3.467      0.360  -9.64   <0.001  70.7 -4.172 -2.7625
#>      2   -2.049      0.299  -6.86   <0.001  37.1 -2.635 -1.4637
#>      3   -0.881      0.411  -2.15   0.0319   5.0 -1.686 -0.0764
#>      4    0.917      0.358   2.56   0.0103   6.6  0.216  1.6186
#>      5    2.047      0.429   4.77   <0.001  19.1  1.206  2.8886
#>      6    4.150      0.427   9.72   <0.001  71.8  3.314  4.9872
#>      7    4.509      0.386  11.68   <0.001 102.3  3.752  5.2651
#>      8    5.220      0.742   7.04   <0.001  38.9  3.766  6.6734
#> 
#> Term: .Dtreat
#> Type: response
#> Comparison: TRUE - FALSE
#> 

# Etc. Other aggregation type options are "simple" (the default), "group"
# and "calendar"

# To visualize results, use the native plot method (see `?plot.emfx`)
plot(mod_es)


# Aside: With R >= 4.1.0, you can also chain the whole workflow together with
# the native pipe, e.g.:
# etwfe(
#   fml  = y ~ x1,
#   tvar = year,
#   gvar = year_treated,
#   data = base_stagg,
#   vcov = ~id
#   ) |>
#   emfx(type = "event") |>
#   plot()

# Notice that we don't get any pre-treatment effects with the default
# "notyet" treated control group. Switch to the "never" treated control
# group if you want this.
mod_never = etwfe(
  y ~ x1, tvar = year, gvar = year_treated, data = base_stagg,
  vcov = ~id,
  cgroup = "never"    ## <= use never treated group as control
  )
plot(emfx(mod_never, "event"))


#
# Heterogeneous treatment effects
#

# Example where we estimate heterogeneous treatment effects for two
# (arbitrary) groups of units.

base_stagg$grp = base_stagg$id > 50

hmod = etwfe(
  y ~ x1, tvar = year, gvar = year_treated, data = base_stagg,
  vcov = ~id,
  xvar = grp           ## <= het. TEs by grp
  )

# Heterogeneous ATEs (could also specify "event", etc.)

emfx(hmod)
#> 
#>  .Dtreat   grp Estimate Std. Error     z Pr(>|z|)   S 2.5 % 97.5 %
#>     TRUE FALSE   -1.603      0.596 -2.69   0.0071 7.1 -2.77 -0.436
#>     TRUE  TRUE   -0.773      0.662 -1.17   0.2431 2.0 -2.07  0.525
#> 
#> Term: .Dtreat
#> Type: response
#> Comparison: TRUE - FALSE
#> 

# To test whether the ATEs across these two groups are statistically
# different, simply pass an appropriate "hypothesis" argument.

emfx(hmod, hypothesis = "b1 = b2")
#> 
#>  Hypothesis Estimate Std. Error      z Pr(>|z|)   S 2.5 % 97.5 %
#>       b1=b2    -0.83      0.879 -0.945    0.345 1.5 -2.55  0.892
#> 
#> Type: response
#> 

plot(emfx(hmod))


#
# Nonlinear model (distribution / link) families
#

# Poisson example (using a transformed, strictly positive outcome)

base_stagg$y_exp = exp(base_stagg$y / 10)

pmod = etwfe(
  y_exp ~ x1, tvar = year, gvar = year_treated, data = base_stagg,
  vcov = ~id,
  family = "poisson"   ## <= family arg for nonlinear options
  )
#> The variables '.Dtreat:year_treated::3:year::2',
#> '.Dtreat:year_treated::4:year::2', '.Dtreat:year_treated::4:year::3',
#> '.Dtreat:year_treated::5:year::2', '.Dtreat:year_treated::5:year::3',
#> '.Dtreat:year_treated::5:year::4' and 66 others have been removed because of
#> collinearity (see $collin.var).
emfx(pmod, "event")
#> 
#>  event Estimate Std. Error      z Pr(>|z|)     S   2.5 %  97.5 %
#>      0   -0.412     0.0268 -15.39  < 0.001 175.0 -0.4647 -0.3597
#>      1   -0.316     0.0362  -8.72  < 0.001  58.4 -0.3864 -0.2446
#>      2   -0.189     0.0300  -6.30  < 0.001  31.7 -0.2483 -0.1305
#>      3   -0.101     0.0457  -2.20  0.02755   5.2 -0.1904 -0.0111
#>      4    0.118     0.0413   2.86  0.00421   7.9  0.0372  0.1991
#>      5    0.275     0.0576   4.77  < 0.001  19.1  0.1621  0.3880
#>      6    0.674     0.0835   8.07  < 0.001  50.4  0.5107  0.8380
#>      7    0.703     0.1041   6.75  < 0.001  36.0  0.4990  0.9070
#>      8    1.176     0.2346   5.01  < 0.001  20.8  0.7165  1.6362
#> 
#> Term: .Dtreat
#> Type: response
#> Comparison: TRUE - FALSE
#>