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Fixed Effects Bias in Panel Data Estimators

Author

Listed:
  • Buddelmeyer, Hielke

    (Melbourne Institute of Applied Economic and Social Research)

  • Jensen, Paul H.

    (University of Melbourne)

  • Oguzoglu, Umut

    (University of Manitoba)

  • Webster, Elizabeth

    (University of Melbourne)

Abstract

Since little is known about the degree of bias in estimated fixed effects in panel data models, we run Monte Carlo simulations on a range of different estimators. We find that Anderson-Hsiao IV, Kiviet’s bias-corrected LSDV and GMM estimators all perform well in both short and long panels. However, OLS outperforms the other estimators when the following holds: the cross-section is small (N = 20), the time dimension is short (T = 5) and the coefficient on the lagged dependent variable is large (? = 0.8).

Suggested Citation

  • Buddelmeyer, Hielke & Jensen, Paul H. & Oguzoglu, Umut & Webster, Elizabeth, 2008. "Fixed Effects Bias in Panel Data Estimators," IZA Discussion Papers 3487, Institute of Labor Economics (IZA).
    • Handle: RePEc:iza:izadps:dp3487
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    References listed on IDEAS

    as
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    3. Bulkley, George & Harris, Richard D. F. & Herrerias, Renata, 2004. "Why does book-to-market value of equity forecast cross-section stock returns?," International Review of Financial Analysis, Elsevier, vol. 13(2), pages 153-160.
    4. Judson, Ruth A. & Owen, Ann L., 1999. "Estimating dynamic panel data models: a guide for macroeconomists," Economics Letters, Elsevier, vol. 65(1), pages 9-15, October.
    5. Mark B. McClellan & Douglas O. Staiger, 2000. "Comparing Hospital Quality at For-Profit and Not- for-Profit Hospitals," NBER Chapters, in: The Changing Hospital Industry: Comparing Not-for-Profit and For-Profit Institutions, pages 93-112, National Bureau of Economic Research, Inc.
    6. Manuel Arellano & Stephen Bond, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 58(2), pages 277-297.
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    More about this item

    Keywords

    fixed effects; panel data; LSDV; dynamic model;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models
    • O11 - Economic Development, Innovation, Technological Change, and Growth - - Economic Development - - - Macroeconomic Analyses of Economic Development
    • E00 - Macroeconomics and Monetary Economics - - General - - - General

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