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Grouped coefficients to reduce bias in heterogeneous dynamic panel models with small T

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  • Nathan P. Hendricks
  • Aaron Smith

Abstract

We propose the grouped coefficients estimator to reduce bias in dynamic panels with small T that have a multilevel structure to the coefficient and factor loading heterogeneity. If groups are chosen such that the within-group heterogeneity is small, then the grouped coefficients estimator can lead to substantial bias reduction compared to pooled GMM dynamic panel estimators. We also propose using a Wald test that can be used to assess whether pooled estimators suffer from heterogeneity bias. We illustrate the usefulness of grouped coefficients with an application to labour demand in which the coefficients are grouped by sub-sector. Our results suggest that the standard pooled estimates are substantially biased.

Suggested Citation

  • Nathan P. Hendricks & Aaron Smith, 2015. "Grouped coefficients to reduce bias in heterogeneous dynamic panel models with small T," Applied Economics, Taylor & Francis Journals, vol. 47(40), pages 4335-4348, August.
    • Handle: RePEc:taf:applec:v:47:y:2015:i:40:p:4335-4348
    DOI: 10.1080/00036846.2015.1029112
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    Cited by:

    1. Devos, Erik & Rahman, Shofiqur & Tsang, Desmond, 2017. "Debt covenants and the speed of capital structure adjustment," Journal of Corporate Finance, Elsevier, vol. 45(C), pages 1-18.
    2. Zhou, Qing & Tan, Kelvin Jui Keng & Faff, Robert & Zhu, Yushu, 2016. "Deviation from target capital structure, cost of equity and speed of adjustment," Journal of Corporate Finance, Elsevier, vol. 39(C), pages 99-120.
    3. Jiti Gao & Bin Peng & Zhao Ren & Xiaohui Zhang, 2015. "Variable Selection for a Categorical Varying-Coefficient Model with Identifications for Determinants of Body Mass Index," Monash Econometrics and Business Statistics Working Papers 21/15, Monash University, Department of Econometrics and Business Statistics.
    4. Shofiqur Rahman, 2020. "Credit supply and capital structure adjustments," Financial Management, Financial Management Association International, vol. 49(4), pages 949-972, December.
    5. Bontempi, Maria Elena & Bottazzi, Laura & Golinelli, Roberto, 2020. "A multilevel index of heterogeneous short-term and long-term debt dynamics," Journal of Corporate Finance, Elsevier, vol. 64(C).

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