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

When the inclusion of state fixed effects leads to a significant increase in R2, it indicates that a large amount of the overall variation in the data can be explained by differences between states that are consistent over time. This suggests that state fixed effects are an important factor to consider in the model. It does not necessarily mean that the other explanatory variables are unimportant or that their coefficients will not change. The relative importance of each variable can be assessed by examining their individual coefficients and statistical significance. The relevance of time fixed effects cannot be determined based on this information alone.

When You Add State Fixed Effects to a Simple Regression