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Time-invariant regressors under fixed effects: Simple identification via a proxy variable

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  • Bělín, Matěj

Abstract

Identification of a coefficient associated with a time-invariant regressor (TIR) often relies on the assumption that the TIR is uncorrelated with the unobserved heterogeneity across panel units. We derive an estimator which avoids the random-effects assumption by employing a proxy for the unobserved heterogeneity thus extending the existing results on proxy variables from the cross-sectional literature. This method is easy to implement using standard routines for linear regression. Monte Carlo evidence shows the proposed estimator performs well is small samples.

Suggested Citation

  • Bělín, Matěj, 2020. "Time-invariant regressors under fixed effects: Simple identification via a proxy variable," Economics Letters, Elsevier, vol. 186(C).
    • Handle: RePEc:eee:ecolet:v:186:y:2020:i:c:s0165176519304057
    DOI: 10.1016/j.econlet.2019.108799
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    More about this item

    Keywords

    Omitted variable bias; Panel data; Random effects;
    All these keywords.

    JEL classification:

    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
    • C3 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables

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