Two-Way Mean Group Estimators for Heterogeneous Panel Models with Fixed <i>T</i>

Abstract We consider a correlated random coefficient panel data model with two-way fixed effects and interactive fixed effects in a fixed T framework. The model allows slope coefficients to be arbitrarily correlated with the regressors, accommodating flexible forms of heterogeneity. We propose a two-way mean group (TW-MG) estimator for the expected value of the slope coefficient and propose a leave-one-out jackknife method for valid inference. We apply our new methods to examine the relationship between health-care expenditure and income.