Various papers that study firm-level effects include dummy variables at the industry & year level.
From what I understand, calculating fixed effects requires panel data, i.e. (for firm-level data) unique firm-to-year matches.
But unless there is exactly one firm per industry, there can be no unique matches for the fixed effects we are looking at, i.e. no unique industry-to-year matches.
My questions are:
(1) Is the common way to deal with this to obtain the average (of the dependent variable) across all firms per industry for each year? This average could then be included as a regressor.
(2) Or should I obtain de-meaned values of the dependent variable per industry and year, and include this as a regressor. I.e., for each observation, create one new variable that contains this observation minus the industry mean (across all years in the sample) and one that contains the observation minus the year mean (across all industries in the sample)?
Or (3) should I just include industry and year dummy variables instead?