When you add state fixed effects to a simple regression model for U.S.states over a certain time period, and the regression R2 increases significantly, then it is safe to assume
That
A)the included explanatory variables, other than the state fixed effects, are unimportant.
B)state fixed effects account for a large amount of the variation in the data.
C)the coefficients on the other included explanatory variables will not change.
D)time fixed effects are unimportant.

Question

Quizplus · Accepted Answer

State fixed effects capture unobserved heterogeneity across states, and a significant increase in R2 indicates they explain a substantial portion of the variation.

When You Add State Fixed Effects to a Simple Regression