Fixed Effects Bias in Panel Data Estimators

9 Pages Posted: 23 May 2008

See all articles by Hielke Buddelmeyer

Hielke Buddelmeyer

Melbourne Institute; IZA Institute of Labor Economics

Paul H. Jensen

University of Melbourne - Melbourne Institute of Applied Economic and Social Research

Umut Oguzoglu

University of Manitoba - Department of Economics; IZA Institute of Labor Economics

Elizabeth Webster

Swinburne University of Technology; University of Melbourne - Melbourne Institute: Applied Economic & Social Research

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 (γ = 0.8).

Keywords: dynamic model, LSDV, panel data, fixed effects

JEL Classification: C23, O11, E00

Suggested Citation

Buddelmeyer, Hielke and Jensen, Paul H. and Oguzoglu, Umut and Webster, Elizabeth M., Fixed Effects Bias in Panel Data Estimators. IZA Working Paper No. 3487, Available at SSRN: https://ssrn.com/abstract=1136288 or http://dx.doi.org/10.1111/j.0042-7092.2007.00700.x

Hielke Buddelmeyer (Contact Author)

Melbourne Institute ( email )

161 Barry Street
Level 7
Parkville, Victoria 3010
Australia
+61383442091 (Phone)

HOME PAGE: http://www.melbourneinstitute.com

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Paul H. Jensen

University of Melbourne - Melbourne Institute of Applied Economic and Social Research ( email )

Level 5, FBE Building, 111 Barry Street
Parkville, Victoria 3010
Australia

Umut Oguzoglu

University of Manitoba - Department of Economics ( email )

Winnipeg, Manitoba R3T 5V5
Canada

HOME PAGE: http://home.cc.umanitoba.ca/~oguzoglu/index.htm

IZA Institute of Labor Economics

P.O. Box 7240
Bonn, D-53072
Germany

Elizabeth M. Webster

Swinburne University of Technology ( email )

Cnr Wakefield and William Streets, Hawthorn Victor
3122 Victoria, Victoria 3122
Australia

University of Melbourne - Melbourne Institute: Applied Economic & Social Research ( email )

Level 5, FBE Building, 111 Barry Street
Parkville, Victoria 3010
Australia

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