Transcription of Econ 582 Fixed Effects Estimation of Panel Data
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Econ 582 Fixed Effects Estimation of Panel Data
Econ 582 Fixed Effects Estimation of Panel DataEric ZivotMay 28, 2012 Panel Data Framework =x0 + =1 (individuals); =1 (time periods)y 1=X ( ) ( 1)+ Main question: Isx uncorrelated with ?1. If yes, then we have a SUR type model with common If no, then we have a multi-equation system with common coefficients andendogenous regressors. We need to use an Estimation procedure to deal withthe endogeneity. In the Panel set-up, under certain assumptions, we can dealwith the endogeneity without using instruments using the so-calledfixed effects(FE) Components Assumption = + =unobservedfixed effect [x ]=0 [ 0 ]= Thefixed effect component (which is actually an unobserved random vari-able) captures unobserved heterogeneity across individuals that isfixed the error components assumption, the RE and FE models are defined asfollows:RE model: [x ]=0FE model: [x ]6=0 Example: Panel wage equation 69 = + 69 + + 69 + + 69 80 = + 80 + + 80 + + 80 [ ]6=0 Here captures unobserved ability that is correlated with.
Within group estimator 2. Least squares dummy variable estimator 3. First difference estimator. Within group estimator To illustrate the within group estimator consider the simplified panel regression ... Now, stack by observation for =1 giving the giant regression ...
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