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.
Remark: With panel data, as we saw in the last lecture, the endogeneity due to unobserved heterogeneity (i.e., [x ] 6=0 ) can be eliminated without the use of instruments. To see this, consider the difference in log-wages over time:
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