Abstract

http://ssrn.com/abstract=1719684
 


 



Grouped Effects Estimators in Fixed Effects Models


Alan Bester


University of Chicago Graduate School of Business

Christian Hansen


University of Chicago Graduate School of Business

February 24, 2009


Abstract:     
We consider estimation of nonlinear panel data models with common and individual specific parameters. Fixed effects estimators are known to suffer from the incidental parameters problem, which can lead to large biases in estimates of common parameters. Pooled estimators, which ignore heterogeneity across individuals, are also generally inconsistent. We assume that individuals in our data are grouped on multiple levels. These groups may be based on some external classification (for example, SIC codes), geographic location (census tract, county, state, etc.), or perhaps based on observable right hand side variables, and may be nested (hierarchical) or non-nested. We consider "group effects" estimators, where individual specific parameters are assumed common across groups at some level. We provide conditions under which group effects estimates of common parameters are asymptotically unbiased and normal. Our conditions suggest a tradeoff between two sources of bias, one due to incidental parameters and the other due to misspecification of unobserved heterogeneity. Our findings suggest that one may wish to control for heterogeneity at the group level even when individual specific effects are present. These findings are confirmed in a Monte Carlo study.

Keywords: Fixed Effects, Panel Data, Hierarchical Models

JEL Classification: C10, C13, C23

working papers series


Not Available For Download

Date posted: December 5, 2010  

Suggested Citation

Bester, Alan and Hansen, Christian, Grouped Effects Estimators in Fixed Effects Models (February 24, 2009). Available at SSRN: http://ssrn.com/abstract=1719684

Contact Information

Alan Bester
University of Chicago Graduate School of Business ( email )
5807 S. Woodlawn Avenue
Chicago, IL 60637
United States
773-834-1714 (Phone)
Christian Hansen (Contact Author)
University of Chicago Graduate School of Business ( email )
Chicago, IL 60637
United States
773-834-1702 (Phone)
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