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What you don’t see can’t hurt you? Panel data analysis and the dynamics of unobservable factors

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  • Pudney, Stephen
  • Hernandez, Monica

Abstract

We investigate the consequences of using time-invariant individual effects in panel data models when the unobservables are in fact time-varying. Using data from the British Offending Crime and Justice panel, we estimate a dynamic factor model of the occurrence of a range of illicit activities as outcomes of young people's development processes. This structure is then used to demonstrate that relying on the assumption of time-invariant individual effects to deal with confounding factors in a conventional dynamic panel data model is likely to lead to spurious "gateway" effects linking cannabis use to subsequent hard drug use.

Suggested Citation

  • Pudney, Stephen & Hernandez, Monica, 2011. "What you don’t see can’t hurt you? Panel data analysis and the dynamics of unobservable factors," ISER Working Paper Series 2011-13, Institute for Social and Economic Research.
    • Handle: RePEc:ese:iserwp:2011-13
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    References listed on IDEAS

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    5. Stephen Pudney, 2010. "Drugs policy: what should we do about cannabis? [Taxes, cigarette consumption and smoking intensity]," Economic Policy, CEPR, CESifo, Sciences Po;CES;MSH, vol. 25(61), pages 165-211.
    6. Jeffrey DeSimone, 1998. "Is Marijuana a Gateway Drug?," Eastern Economic Journal, Eastern Economic Association, vol. 24(2), pages 149-164, Spring.
    7. MacCoun,Robert J. & Reuter,Peter, 2001. "Drug War Heresies," Cambridge Books, Cambridge University Press, number 9780521799973, January.
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    10. Stephen Pudney, 2003. "The Road to Ruin? Sequences of Initiation to Drugs and Crime in Britain," Economic Journal, Royal Economic Society, vol. 113(486), pages 182-198, March.
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    Cited by:

    1. Pudney, Stephen & Bryan, Mark & DelBono, Emilia, 2013. "Licensing and regulation of the cannabis market in England and Wales: Towards a cost-benefit analysis," MPRA Paper 50365, University Library of Munich, Germany.

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