Fixed Effects and the Generalized Mundlak Estimator

Abstract: We develop a new approach for estimating average treatment effects in observational studies with unobserved group-level heterogeneity. We consider a general model with group-level unconfoundedness and provide conditions under which aggregate balancing statistics -- group-level averages of functions of treatments and covariates -- are sufficient to eliminate differences between groups. Building on these results, we reinterpret commonly used linear fixed-effect regression estimators by writing them in the Mundlak form as linear regression estimators without fixed effects but including group averages. We use this representation to develop Generalized Mundlak Estimators (GMEs) that capture group differences through group averages of (functions of) the unit-level variables and adjust for these group differences in flexible and robust ways in the spirit of the modern causal literature.