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Panel data regression involves two types of fixed effects: entity fixed effect and time fixed effect. Entity fixed effect varies across entities but not over time, while time fixed effect is constant among entities but varies over time. Entity fixed effects allow for controlling variables that do not change over time but differ across entities. It includes n different intercepts, one for each entity, keeping the slope the same but the intercepts different. Binary variables can represent changes in intercepts for each entity, absorbing influences that vary among entities but not over time.