AgEc 551: Applied Econometrics

Lecture 9: Panel Data Models

Anbes Tenaye
[email protected]
Hawassa University, CA, FEGDS
Dept. of Agricultural Economics

Stock and Watson Chapter 10

25. 12. 2022.

 2

OLS: The Least Squares Assumptions

Yi = 0 + 1 Xi + ui

Assumption 1: zero conditional mean assumption: E[ui |Xi] = 0

Assumption 2: (Xi , Yi ) are i.i.d. draws from joint distribution
Assumption 3: Large outliers are unlikely

• Under these three assumption the OLS estimators are unbiased,

consistent and normally distributed in large samples.

• Last time we discussed threats to internal validity

• In this lecture we discuss a method we can use in case of omitted

variables
• Omitted variable is a determinant of the outcome Yi
• Omitted variable is correlated with regressor of interest Xi
 3

Omitted variables

• Multiple regression model was introduced to mitigate omitted variables

problem of simple regression

Yi = 0 + 1 X 1i + 2 X 2i + 3 X 3i + ... + k Xki + ui

• Even with multiple regression there is threat of omitted variables:

• some factors are difficult to measure

• sometimes we are simply ignorant about relevant factors

• Multiple regression based on panel data may mitigate deterimental effect

of omitted variables without actually observing them.
 4

Panel data

Cross-sectional data:

A sample of individuals observed in 1 time period

2010

Panel data: same sample of individuals observed in multiple time periods

2010

2011

2012
 5

Panel data; notation

• Panel data consist of observations on n entities (cross-sectional units)

and T time periods

• Particular observation denoted with two subscripts (i and t)

Yit = 0 + 1 Xit + uit

• Yit outcome variable for individual i in year t

• For balanced panel this results in nT observations

 6

Advantages of panel data

• More control over omitted variables.

• More observations.

• Many research questions typically involve a time component.

 7

The effect of alcohol taxes on traffic deaths

• About 40,000 traffic fatalities each year in the U.S.

• Approximately 25% of fatal crashes involve driver who drank alcohol.

• Government wants to reduce traffic fatalities.

• One potential policy: increase the tax on alcoholic beverages.

• We have data on traffic fatality rate and tax on beer for 48 U.S. states in
1982 and 1988.

• What is the effect of increasing the tax on beer on the traffic fatality rate?
 8

Data from 1982

4 Traffic deaths and alcohol taxes in 1982

Traffic fatality rate
3
2
1
0

0 .5 1 1.5 2 2.5 3
Tax on beer (in real dollars)

\ i,1982
FatalityRate = 2.01 + 0.15 BeerTaxi,1982
(0.14) (0.18)
 9

Data from 1988

4 Traffic deaths and alcohol taxes in 1988

Traffic fatality rate
3
2
1
0

0 .5 1 1.5 2 2.5
Tax on beer (in real dollars)

\ i,1988
FatalityRate = 1.86 + 0.44 BeerTaxi,1988
(0.11) (0.16)
 10

Panel data: before-after analysis

• Both regression using data from 1982 & 1988 likely suffer from omitted
variable bias

• We can use data from 1982 and 1988 together as panel data

• Panel data with T = 2

• Observed are Yi1 , Yi2 and Xi1 , Xi2

• Suppose model is

Yit = 0 + 1 Xit + 2 Zi + uit

and we assume E(uit |Xi1 , Xi2 , Zi ) = 0

• Zi are (unobserved) variables that vary between states but not over time
• (such as local cultural attitude towards drinking and driving)

• Parameter of interest is 1
 11

Panel data
 12

Panel data: before

• Consider cross-sectional regression for first period (t = 1):

Yi1 = 0 + 1 Xi1 + 2 Zi + ui1 E [ui |Xi1 , Zi ] = 0

• Zi observed: multiple regression of Yi1 on constant, Xi1 and Zi leads to

unbiased and consistent estimator of 1

• Zi not observed: regression of Yi1 on constant and Xi1 only results in

unbiased estimator of 1 when Cov (Xi1 , Zi ) = 0

• What can we do if we don’t observe Zi ?

 13

Panel data: after

• We also observe Yi2 and Xi2 , hence model for second period is:

Yi2 = 0 + 1 Xi2 + 2 Zi + ui2

• Similar to argument before cross-sectional analysis for period 2 might

fail

• Problem is again the unobserved heterogeneity embodied in Zi

 14

Before-after analysis (first differences)

• We have
Yi1 = 0 + 1 Xi1 + 2 Zi + ui1
and
Yi2 = 0 + 1 Xi2 + 2 Zi + ui2
• Subtracting period 1 from period 2 gives

Yi2 Yi1 = ( 0 + 1 Xi2 + 2 Zi + ui2 ) ( 0 + 1 Xi1 + 2 Zi + ui1 )

• Applying OLS to:

Yi2 Yi1 = 1 (Xi2 Xi1 ) + (ui2 ui1 )

will produce an unbiased and consistent estimator of 1

• Advantage of this regression is that we do not need data on Z

• By analyzing changes in dependent variable we automatically control for

time-invariant unobserved factors
 15

Data from 1982 and 1988

Traffic deaths and alcohol taxes: before−after

.2 .4 .6 .8
Fatality rate 1988 − Fatatlity rate 1982
−1.4−1.2 −1 −.8 −.6 −.4 −.2 0

−.6 −.4 −.2 0 .2 .4

Beer tax 1988 − Beer tax 1982

\
Fatalityi,1988 Fatalityi,1982 = 0.07 1.04 (BeerTaxi,1988 BeerTaxi,1982 )
(0.06) (0.42)
 16

Panel data with more than 2 time periods

 17

Panel data with more than 2 time periods

• Panel data with T 2

Yit = 0 + 1 Xit + 2 Zi + uit , i = 1, ..., n; t = 1, ..., T

• Yit is dependent variable; Xit is explanatory variable; Zi are state

specific, time invariant variables

• Equation can be interpreted as model with n specific intercepts (one for

each state)

Yit = 1 Xit + ↵i + uit , with ↵i = 0 + 2 Zi

• ↵i , i = 1, ..., n are called entity fixed effects

• ↵i models impact of omitted time-invariant variables on Yit

 18

State specific intercepts

4
3.5
Predicted fatality rate
3
2.5
2
1.5
1
.5
0

0 .5 1 1.5 2 2.5 3
beer tax
Alabama Arizona
Arkansa California
 19

Fixed effects regression model

Least squares with dummy variables

Having data on Yit and Xit how to determine 1?

• Population regression model: Yit = 1 Xit + ↵i + uit

• In order to estimate the model we have to quantify ↵i

• Solution: create n dummy variables D1i , ..., Dni

• with D1i = 1 if i = 1 and 0 otherwise,
• with D2i = 1 if i = 2 and 0 otherwise,....

• Population regression model can be written as:

Yit = 1 Xit + ↵1 D1i + ↵2 D2i + ... + ↵n Dni + uit

 20

Fixed effects regression model

Least squares with dummy variables

• Alternatively, population regression model can be written as:

Yit = 0 + 1 Xit + 2 D2i + ... + n Dni + uit

with 0 = ↵1 and i = ↵i 0 for i > 1

• Interpretation of 1 identical for both representations

• Ordinary Least Squares (OLS): choose ˆ0 , ˆ1 , ˆ2 ..., ˆn to minimize

squared prediction mistakes (SSR):
n X
X T ⇣ ⌘2
Yit ˆ0 ˆ1 Xit ˆ2 D2i ... ˆn Dni
i=1 t=1

• SSR is function of ˆ0 , ˆ1 , ˆ2 ..., ˆn

 21

Fixed effect regression model

Least squares with dummy variables

n X
X T ⇣ ⌘2
Yit ˆ0 ˆ1 Xit ˆ2 D2i ... ˆn Dni
i=1 t=1

OLS procedure:

• Take partial derivatives of SSR w.r.t. ˆ0 , ˆ1 , ˆ2 ..., ˆn

• Equal partial derivatives to zero resulting in n + 1 equations with n + 1

unknown coefficients

• Solutions are the OLS estimators ˆ0 , ˆ1 , ˆ2 ..., ˆn

 22

Fixed effect regression model

Least squares with dummy variables

• Analytical formulas require matrix algebra

• Algebraic properties OLS estimators (normal equations, linearity) same

as for simple regression model

• Extension to multiple X ’s straightforward: n + k normal equations

• OLS procedure is also labeled Least Squares Dummy Variables (LSDV)

method

• Dummy variable trap: Never include all n dummy variables and the
constant term!
 23

Fixed effect regression model

Within estimation

• Typically n is large in panel data applications

• With large n computer will face numerical problem when solving system
of n + 1 equations

• OLS estimator can be calculated in two steps

• First step: demean Yit and Xit

• Second step: use OLS on demeaned variables

 24

Fixed effect regression model

Within estimation

• We have

Yit = 1 Xit + ↵i + uit

Ȳi = 1 X̄i + ↵i + ūi

1
PT
• Ȳi = T t=1 Yit , etc. is entity mean

• Subtracting both expressions leads to

Yit Ȳi = ( 1 Xit + ↵i + uit ) ( 1 X̄i + ↵i + ūi )

Ỹit = 1 X̃it + ũit

• Ỹit = Yit Ȳi , etc. is entity demeaned variable

• ↵i has disappeared; OLS on demeaned variables involves solving one

normal equation only!
 25

Fixed effect regression model

Within estimation
 26

Fixed effect regression model

Within estimation

• Entity demeaning is often called the Within transformation

• Within transformation is generalization of "before-after" analysis to more

than T = 2 periods

• Before-after: Yi2 Yi1 = 1 (Xi2 Xi1 ) + (ui2 ui1 )

• Within: Yit Ȳi = 1 (Xit X̄i ) + (uit ūi )

• LSDV and Within estimators are identical:

\ it
FatalityRate = 0.66 BeerTaxit + State dummies
(0.19)

(FatalityRate\
it FatalityRate) = 0.66 (BeerTaxit BeerTax)
(0.19)
 27

Fixed effects regression model

time fixed effects

• In addition to entity effects we can also include time effects in the model

• Time effects control for omitted variables that are common to all entities
but vary over time

• Typical example of time effects: macroeconomic conditions or federal

policy measures are common to all entities (e.g. states) but vary over
time

• Panel data model with entity and time effects:

Yit = 1 Xit + ↵i + t + uit

 28

Fixed effects regression model

time fixed effects

• OLS estimation straightforward extension of LSDV/Within estimators of

model with only entity fixed effects

• LSDV: create T dummy variables B1t ....BTt

Yit = 0 + 1 Xit + 2 D2i + ... + n Dni

+ 2 B2t + 3 B3t + ... + T BTt + uit

• Within estimation: Deviating Yit and Xit from their entity and time-period
means

• The effect of the tax on beer on the traffic fatality rate:

\ it
FatalityRate = 0.64 BeerTaxit + State dummies + Time dummies
(0.20)
 29

Fixed effects regression model

statistical properties OLS

Yit = 1 Xit + ↵i + t + uit

statistical assumptions are:

ASS #1: E (uit |Xi1 , ..., XiT , ↵i , t) =0

ASS #2: (Xi1 , ..., XiT , Yi1 , ..., YiT ) are i.i.d. over the cross-section

ASS #3: large outliers are unlikely

ASS #4: no perfect multicollinearity

ASS #5: cov (uit , uis |Xi1 , ..., XiT , ↵i , t) = 0 for t 6= s

 30

Fixed effects regression model

statistical properties OLS

ASS #1 to ASS #5 imply that:

• OLS estimator ˆ1 is unbiased and consistent estimator of 1

• OLS estimators approximately have a normal distribution

remarks:

• ASS #1 is most important

• extension to multiple X ’s straightforward

Yit = 1 X 1it + 2 X 2it + ... + k Xkit + ↵i + t + uit

• additional assumption ASS #5 implies that error terms are uncorrelated

over time (no autocorrelation)
 31

Fixed effects regression model

Clustered standard errors

• Violation of assumption #5: error terms are correlated over time:

(Cov (uit , uis ) 6= 0)

• uit contains time-varying factors that affect the traffic fatality rate (but
that are uncorrelated with the beer tax)

• These omitted factors might for a given entity be correlated over time

• Examples: downturn in local economy, road improvement project

• Not correcting for autocorrelation leads to standard errors which are

often too low
 32

Fixed effects regression model

Clustered standard errors

• Solution: compute HAC-standard errors (clustered se’s)

• robust to arbitrary correlation within clusters (entities)
• robust to heteroskedasticity
• assume no correlation across entities

• Clustered standard errors valid whether or not there is

heteroskedasticity and/or autocorrelation

• Use of clustered standard errors problematic when number of entities is

below 50 (or 42)

• In stata: command, cluster(entity)

 33

The effect of a tax on beer on traffic fatalities

Dependent variable: traffic fatality rate (number of deaths per 10 000)

Beer tax 0.36*** -0.66*** -0.64*** -0.59*** -0.59*

(0.06) (0.19) (0.20) (0.18) (0.33)

State fixed effects - yes yes yes yes

Time fixed effects - - yes yes yes
Additional control variables - - - yes yes
Clustered standard errors - - - - yes
N 336 336 336 336 336
Note: * significant at 10% level, ** significant at 5% level, *** significant at 1% level. Control variables: Unemployment rate, per capita
income, minimum legal drinking age.
 34

Panel data: an example

returns to schooling

Yit = 1 Xit + ↵i + uit

• Yit is logarithm of individual earnings; Xit is years of completed

education

• ↵i unobserved ability

• Likely to be cross-sectional correlation between Xit and ↵i , hence

standard cross-sectional analysis with OLS fails

• However, in this case panel data does not solve the problem because Xit
typically lacks time series variation (Xit = Xi )

• We have to resort to cross-sectional methods (instrumental variables) to

identify returns to schooling
 35

Panel data: Cigarette taxes and smoking

• Is there an effect of cigarette taxes on smoking behavior?

Yit = 1 Xit + ↵i + uit

• Yit number of packages per capita in state i in year t, Xit is real tax on
cigarettes in state i in year t

• ↵i is a state specific effect which includes state characteristics which are

constant over time

• Data for 48 U.S. states in 2 time periods: 1985 and 1995

 36

Panel data: Cigarette taxes and smoking

Lpackpc = log number of packages

Multiple per capita in state i in year t
regression
rtax = real avr cigarette specific tax during fiscal year in state i
Lperinc = log per capita real income
Lperinc = log per capita real income

. regress lpackpc rtax lperinc

Source | SS df MS Number of obs = 96

-------------+------------------------------ F( 2, 93) = 21.25
Model | 1.76908655 2 .884543277 Prob > F = 0.0000
Residual | 3.87049389 93 .041618214 R-squared = 0.3137
-------------+------------------------------ Adj R-squared = 0.2989
Total | 5.63958045 95 .059364005 Root MSE = .20401

------------------------------------------------------------------------------
lpackpc | Coef. Std. Err. t P>|t| [95% Conf. Interval]
-------------+----------------------------------------------------------------
rtax | -.0156393 .0027975 -5.59 0.000 -.0211946 -.0100839
lperinc | -.0139092 .158696 -0.09 0.930 -.3290481 .3012296
_cons | 5.206614 .3781071 13.77 0.000 4.455769 5.95746
------------------------------------------------------------------------------
 37

Panel data: Cigarette taxes and smoking

Before-After estimation

. gen diff_rtax= rtax1995- rtax1985

. gen diff_lpackpc= lpackpc1995- lpackpc1985

. gen diff_lperinc= lperinc1995- lperinc1985

. regress diff_lpackpc diff_rtax diff_lperinc, nocons

Source | SS df MS Number of obs = 48

-------------+------------------------------ F( 2, 46) = 145.66
Model | 3.33475011 2 1.66737506 Prob > F = 0.0000
Residual | .526571782 46 .011447213 R-squared = 0.8636
-------------+------------------------------ Adj R-squared = 0.8577
Total | 3.86132189 48 .080444206 Root MSE = .10699

------------------------------------------------------------------------------
diff_lpackpc | Coef. Std. Err. t P>|t| [95% Conf. Interval]
-------------+----------------------------------------------------------------
diff_rtax | -.0169369 .0020119 -8.42 0.000 -.0209865 -.0128872
diff_lperinc | -1.011625 .1325691 -7.63 0.000 -1.278473 -.7447771
 stateB14 | 7.798515 .3224854 24.18 0.000 7.149385 8.447644
stateB15 | 7.970896 .3115618 25.58 0.000 7.343755 8.598038 38

Panel data: Cigarette taxes and smoking

stateB16 |
stateB17 |
7.76369
8.153021
.3054667
.3379089
25.42
24.13
0.000
0.000
7.148817
7.472845
8.378562
8.833196
stateB18 | 7.981185 .3445702 23.16 0.000 7.287601 8.674769
stateB19 | 7.913551 .3040506 26.03 0.000 7.301528 8.525573
stateB20 | 8.184433 .3161916 25.88 0.000 7.547972 8.820893
stateB21 | 7.982302 .3263579 24.46 0.000 7.325377 8.639226
Least squares with dummy variables (no constant term)
stateB22 |
stateB23 |
7.940574
7.510587
.3240931
.286568
24.50
26.21
0.000
0.000
7.288208
6.933755
8.59294
8.087418
stateB24 | 7.528216 .3022437 24.91 0.000 6.919831 8.136601
. regress lpackpc
stateB25 | rtax lperinc .325862
7.820886 stateB*, nocons
24.00 0.000 7.16496 8.476812
stateB26 | 7.695812 .3006968 25.59 0.000 7.090541 8.301083
Source | |
stateB27 SS
7.805769 df
.3173062 MS 24.60 0.000 Number of obs = 8.444473
7.167064 96
-------------+------------------------------
stateB28 | 8.476793 .3368112 25.17 0.000 F( 50, 46) = 7317.61
7.798827 9.154759
Model |
stateB29 | 2094.15728
8.16063 50 41.8831457
.3471406 23.51 0.000 Prob > F
7.461872 = 0.0000
8.859388
Residual | | .263285891
stateB30 7.289755 46 .005723606
.303753 24.00 0.000 R-squared
6.678332 = 7.901178
0.9999
-------------+------------------------------
stateB31 | 8.093636 .3349122 24.17 0.000 Adj R-squared
7.419493 = 0.9997
8.76778
Total | | 2094.42057
stateB32 8.100707 96 21.8168809
.3376925 23.99 0.000 Root 7.420967
MSE = 8.780447
.07565
stateB33 | 7.962421 .3259884 24.43 0.000 7.306241 8.618602
------------------------------------------------------------------------------
stateB34 | 7.852661 .3092282 25.39 0.000 7.230217 8.475106
lpackpc | |
stateB35 Coef.
7.919774 Std. Err.
.316368 t
25.03 P>|t|
0.000 [95% Conf. Interval]
7.282958 8.556589
-------------+----------------------------------------------------------------
stateB36 | 7.940046 .3256142 24.38 0.000 7.284619 8.595473
rtax |
stateB37 | -.0169369
8.178333 .0020119
.3197929 -8.42
25.57 0.000
0.000 -.0209865
7.534623 -.0128872
8.822043
lperinc |
stateB38 | -1.011625
7.611761 .1325691
.310087 -7.63
24.55 0.000
0.000 -1.278473
6.987588 -.7447771
8.235933
stateB1 | | 7.663688
stateB39 7.644086 .3037711
.3051323 25.23
25.05 0.000
0.000 7.052229
7.029887 8.275148
8.258286
stateB2 | | 7.834448
stateB40 7.846138 .2926539
.3163243 26.77
24.80 0.000
0.000 7.245367
7.20941 8.42353
8.482865
stateB3 |
stateB41 | 7.678433
7.801418 .3121525
.3152238 24.60
24.75 0.000
0.000 7.050103
7.166906 8.306763
8.435931
stateB4 |
stateB42 | 7.66627
7.045477 .3392221
.3014862 22.60
23.37 0.000
0.000 6.983451
6.438617 8.349088
7.652337
stateB5 |
stateB43 | 7.817715
7.816716 .3369548
.3458507..23.20..
22.60 0.000..
0.000 7.13946
7.120554 8.49597
8.512877
stateB6 | | 8.261411
stateB44
stateB7
7.99247 .3538431
| | 8.189483
.
.3153114 23.35 .
25.35 0.000 .
0.000 7.549161
7.357781 8.97366
8.627159
stateB45 7.844359 .3402545
.3193189 24.07
24.57 0.000
0.000 7.504586
7.201603 8.874379
8.487114
stateB8 |
stateB46 | 7.989006
7.92666 .3242982
.3154175 24.63
25.13 0.000
0.000 7.336228
7.291758 8.641784
8.561563
stateB9 |
stateB47 | 7.754668
7.644741 .3228567
.2936826 24.02
26.03 0.000
0.000 7.104791
7.053589 8.404545
8.235894
stateB10 |
stateB48 | 7.837622
7.825943 .3121558
.3275694 25.11
23.89 0.000
0.000 7.209285
7.16658 8.465959
8.485306
stateB11 | 7.459151 .3036824 24.56 0.000 6.84787 8.070432
stateB12 | 7.993558 .3339735 23.93 0.000 7.321305 8.665812
stateB13 | 7.952852 .3213272 24.75 0.000 7.306054 8.59965
 stateB15 | .1541802 .0833424 1.85 0.071 -.0135794 .3219398 39
stateB16 | -.053026 .0896575 -0.59 0.557 -.2334973 .1274452
Panel data: Cigarette taxes and smoking
stateB17 | .3363049 .0892101 3.77 0.000 .1567343 .5158755
stateB18 | .1644693 .0802952 2.05 0.046 .0028434 .3260952
stateB19 | .0968347 .0950611 1.02 0.314 -.0945133 .2881827
stateB20 | .3677169 .1012653 3.63 0.001 .1638804 .5715534
stateB21 | .1655858 .0879262 1.88 0.066 -.0114005 .3425721
Least squares with dummy variables with constant term
stateB22 | .1238581 .0809845 1.53 0.133 -.0391553 .2868715
stateB23 | -.306129 .0993309 -3.08 0.003 -.5060717 -.1061863
stateB24 | -.2885003 .0909945 -3.17 0.003 -.4716627 -.1053379
. regress lpackpc rtax lperinc stateB*
stateB25 | .0041703 .0783667 0.05 0.958 -.1535736 .1619142
stateB26 | -.1209041 .097897 -1.24 0.223 -.3179605 .0761523
Source | SS df MS Number of obs = 96
stateB27 | -.0109474 .0876406 -0.12 0.901 -.1873588 .1654641
-------------+------------------------------ F( 49, 46) = 19.17
stateB28 | .6600769 .080162 8.23 0.000 .4987191 .8214346
Model | 5.37629455 49 .109720297 Prob > F = 0.0000
stateB29 | .3439141 .0847627 4.06 0.000 .1732956 .5145326
Residual | .263285891 46 .005723606 R-squared = 0.9533
stateB30 | -.5269606 .0897912 -5.87 0.000 -.7077008 -.3462204
-------------+------------------------------ Adj R-squared = 0.9036
stateB31 | .2769205 .0818311 3.38 0.001 .112203 .441638
Total | 5.63958045 95 .059364005 Root MSE = .07565
stateB32 | .2839913 .0886372 3.20 0.002 .1055738 .4624087
------------------------------------------------------------------------------
stateB33 | .1457052 .0816672 1.78 0.081 -.0186823 .3100927
lpackpc | Coef. Std. Err. t P>|t| [95% Conf. Interval]
stateB34 | .0359454 .0888625 0.40 0.688 -.1429256 .2148164
-------------+----------------------------------------------------------------
stateB35 | .1030576 .0892666 1.15 0.254 -.0766268 .2827421
rtax | -.0169369 .0020119 -8.42 0.000 -.0209865 -.0128872
stateB36 | .1233301 .0841296 1.47 0.149 -.0460139 .2926741
lperinc | -1.011625 .1325691 -7.63 0.000 -1.278473 -.7447771
stateB37 | .3616172 .0944748 3.83 0.000 .1714493 .551785
stateB1 | -.1530275 .0900694 -1.70 0.096 -.3343279 .0282728
stateB38 | -.2049553 .0844374 -2.43 0.019 -.374919 -.0349917
stateB2 | .0177322 .1005272 0.18 0.861 -.1846185 .220083
stateB39 | -.1726295 .0900946 -1.92 0.062 -.3539805 .0087216
stateB3 |
stateB40 |
-.138283
.0294217
.090497
.0831769 ..-1.53
..
0.35 ..
0.133
0.725
-.320444
-.1380046
.043878
.1968481
stateB4 | -.1504462
stateB41 | -.0152979
stateB5 | .0009988
.0801936
.0905599
.078887
.-1.88
-0.17
0.01
. 0.067
0.867
0.990
. -.3118675
-.1975855
-.1577924
.0109752
.1669898
.1597901
stateB42 | -.771239 .0918679 -8.40 0.000 -.9561594 -.5863186
stateB6 | .4446946 .0876663 5.07 0.000 .2682314 .6211578
stateB43 | (dropped)
stateB7 | .3727666 .078856 4.73 0.000 .2140378 .5314954
stateB44 | .1757536 .0854144 2.06 0.045 .0038233 .347684
stateB8 | .1722899 .086112 2.00 0.051 -.0010446 .3456245
stateB45 | .0276429 .0948094 0.29 0.772 -.1631985 .2184843
stateB9 | -.0620478 .0805976 -0.77 0.445 -.2242824 .1001867
stateB46 | .1099444 .0918156 1.20 0.237 -.0748708 .2947597
stateB10 | .0209059 .0902435 0.23 0.818 -.1607448 .2025567
stateB47 | -.1719747 .0959042 -1.79 0.080 -.3650198 .0210705
stateB11 | -.3575647 .0902771 -3.96 0.000 -.5392832 -.1758463
stateB48 | .0092272 .0787188 0.12 0.907 -.1492255 .16768
stateB12 | .1768425 .0830081 2.13 0.039 .009756 .3439291
_cons | 7.816716 .3458507 22.60 0.000 7.120554 8.512877
stateB13 | .1361364 .0812452 1.68 0.101 -.0274018 .2996745
------------------------------------------------------------------------------
stateB14 | -.018201 .0832216 -0.22 0.828 -.1857174 .1493153
stateB15 | .1541802 .0833424 1.85 0.071 -.0135794 .3219398
 40

Panel data: Cigarette taxes and smoking

Within estimation
. xtreg lpackpc rtax lperinc, fe i(STATE)

Fixed-effects (within) regression Number of obs = 96

Group variable: STATE Number of groups = 48

R-sq: within = 0.8636 Obs per group: min = 2

between = 0.0896 avg = 2.0
overall = 0.2354 max = 2

F(2,46) = 145.66
corr(u_i, Xb) = -0.5687 Prob > F = 0.0000

------------------------------------------------------------------------------
lpackpc | Coef. Std. Err. t P>|t| [95% Conf. Interval]
-------------+----------------------------------------------------------------
rtax | -.0169369 .0020119 -8.42 0.000 -.0209865 -.0128872
lperinc | -1.011625 .1325691 -7.63 0.000 -1.278473 -.7447771
_cons | 7.856714 .3150362 24.94 0.000 7.222579 8.490849
-------------+----------------------------------------------------------------
sigma_u | .25232518
sigma_e | .07565452
rho | .91751731 (fraction of variance due to u_i)
------------------------------------------------------------------------------
F test that all u_i=0: F(47, 46) = 13.41 Prob > F = 0.0000