Scribd
Upload
14 views

Lecture 5 - Panel data models

The document discusses various panel data methods including fixed effects estimation, random effects estimation, and difference-in-differences. It explains the fixed effects transformation and its implications for unbiased estimation, as well as the structure of random effects models. Additionally, it addresses further issues such as handling non-continuous dependent variables, endogeneity, and non-linear functions in panel data analysis.

Uploaded by

linhngoc9204
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
14 views

Lecture 5 - Panel data models

The document discusses various panel data methods including fixed effects estimation, random effects estimation, and difference-in-differences. It explains the fixed effects transformation and its implications for unbiased estimation, as well as the structure of random effects models. Additionally, it addresses further issues such as handling non-continuous dependent variables, endogeneity, and non-linear functions in panel data analysis.

Uploaded by

linhngoc9204
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PPT, PDF, TXT or read online on Scribd
You are on page 1/ 14

Panel Data Methods

 Fixed effects estimation


 Random effects estimation
 Difference-in-differences
 Further issues
Fixed effects estimation
 Consider a model with a single explanatory
variable: for each i:

 For each i, average this equation over time. We


get:

 Where and similar denotation for


other variables.
Fixed effects estimation
 Subtract two above equations, we get:

or:

where is the time-demeaned data on y,


and similarly for xit and uit.
 The fixed effects transformation is also called the
within transformation. The importance is that the
unobserved effect, ai has disappeared.
Fixed effects estimation
 Under a strict exogeneity assumption on the
explanatory variables, the fixed effects estimator is
unbiased: roughly, the idiosyncratic error uit should
be uncorrelated with each explanatory variable
across all time periods.
 The fixed effects estimator allows for arbitrary
correlation between ai and the explanatory
variables in any time period.
 Any explanatory variable that is constant over time
is removed by the fixed effects transformation.
Fixed effects estimation
 We can estimate the between-effects model:

 In Stata output, there are some R-squared:


 R-sq: within:

 R-sq: between

 R-sq: overall
Fixed effects estimation
 The composite error eit is decomposed into:

 Since ai is constant, eit is correlated with uit and


this correlation is computed by
 2
 a
 
2
a
2
u
Fixed effects estimation
 We should not perform data transformation and run
OLS on the transformed data. Although the point
estimates are correct, the standard error is invalid.
Since:
 OLS on transformed data by ourselves will use

(NT – k) degree of freedom.


 However, because of transformation of data, the

correct degree freedom is (NT – N – k). In Stata we


use xtreg command for fixed-effects model.
Fixed effects estimation
 We can perform fixed-effects model by running
OLS on dummy variables of observations.
 See computer example
Panel data format
id year age wage
1 2002 43 2.3
2 2002 45 4.4
3 2002 54 5.3
4 2002 32 2.3
1 2003 44 3.2
2 2003 46 4.4
3 2003 55 4.2
4 2003 33 5.1
1 2004 45 3.2
2 2004 47 4.8
3 2004 56 5.7
4 2004 34 4.1
Random effects model

• Instead of treating β1i as fixed, we assume that it is a


random variable with a mean value of β1
• The intercept value for an individual company can be
expressed as

where εi is a random error term


• Four companies have a common mean value for the
intercept ( =β1) and the individual differences in the
intercept values of each company are reflected in the
error term εi
Random effects model

• Substituting β1i into Yit, we obtain

where

• The composite error term wit consists of two


components, εi , which is the cross-section, or individual-
specific, error component, and uit, which is the combined
time series and cross-section error component.
Difference-in-differences
 Consider a model:
yit 1 xit   2 Dit  uit
where :
 t = 1, 2, i.e., two-periods panel data (or pooled

cross sectional data)


 D is a binary variables, which is equal 0 for all
observations at the time t1.
 D is correlated with D.

 Then we can estimate  by:


2

yit 1 xit   2 DitTit   3 Dit   4Tit  uit


Further issues
 Dependent variables are not continuous:
 Multinomial logit, ordered logit.

 Count model

 Fractional logit model

 Limited dependent variable:


 Tobit models

 Truncated/censored models

 Sample selection models


Further issues
 Endogeneity issues:
 Randomized design

 Simultaneous equation model

 Regression discontinuity

 Non-linear functions:
 Non-linear models

 Matching

 Panel and time-series models

You might also like