Throwing out the baby with the bath water: A comment on Green, Kim, and Yoon

Donald P. Green, Soo Yeon Kim, and David H. Yoon argue that many findings i n quantitative international relations that use the dyad-year design are fl awed. In particular, they argue that the effect of democracy on both trade and conflict has been vastly overstated, that researchers have ignored unob served heterogeneity between the various dyads, and that heterogeneity can be best modeled by "fixed effects." that is, a model that includes a separa te dummy for each dyad. We argue that the use of fixed effects is almost always a bad idea for dyad -year data with a binary dependent variable like conflict. This is because conflict is a rare event, and the inclusion of fixed effects requires us to not analyze dyads that never conflict. Thus while the 90 percent of dyads that never conflict are more likely to be democratic, the use of fixed effe cts gives democracy no credit for the lack of conflict in these dyads. Gree n, Kim, and Yoon's fixed-effects logit can tell us little, if anything, abo ut the pacific effects of democracy. Their analysis of the impact of democracy on trade is also flawed. The incl usion of fixed effects almost always masks the impact of slowly changing in dependent variables; the democracy score is such a variable. Thus it is no surprise that the inclusion of dyadic dummy variables in their model comple tely masks the relationship between democracy and trade. We show that their preferred fixed-effects specification does not outperform a model with no effects (when that model is correctly specified in other ways). Thus there is no need to include the masking fixed effects, and so Green, Kim, and Yoo n's findings do not overturn previous work that found that democracy enhanc ed trade. We agree with Green, Kim, and Yoon that modeling heterogeneity in time-seri es cross-section data is important. We mention a number of alternatives to their fixed-effects approach, none of which would have the pernicious conse quences of using dyadic dummies in their two reanalyses.