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Shrinkage estimation of panel data models with interactive effects

Author

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  • Li, Haiqi
  • Chen, Xingyi
  • Liang, Jufang

Abstract

This study proposes a shrinkage estimator for linear panel data models. Our estimator is a weighted average of the additive and interactive effects estimators where the weight is inversely proportional to the Hausman-type test statistic. We establish the asymptotic distribution of the shrinkage estimator and show that its asymptotic risk is strictly smaller than that of the interactive estimator. A Monte Carlo simulation shows that the shrinkage estimator has a substantially smaller finite sample error relative to other estimators.

Suggested Citation

  • Li, Haiqi & Chen, Xingyi & Liang, Jufang, 2022. "Shrinkage estimation of panel data models with interactive effects," Economics Letters, Elsevier, vol. 210(C).
    • Handle: RePEc:eee:ecolet:v:210:y:2022:i:c:s0165176521004699
    DOI: 10.1016/j.econlet.2021.110228
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    References listed on IDEAS

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    More about this item

    Keywords

    Additive effects; Fixed effects; Hausman test; Interactive effects; Shrinkage estimator;
    All these keywords.

    JEL classification:

    • C13 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General - - - Estimation: General
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models

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