To Pool or Not to Pool: Revisited

22 Pages Posted: 6 Jul 2015

See all articles by M. Hashem Pesaran

M. Hashem Pesaran

University of Southern California - Department of Economics; University of Cambridge - Trinity College (Cambridge)

Qiankun Zhou

University of Southern California

Multiple version iconThere are 3 versions of this paper

Date Written: June 29, 2015

Abstract

This paper provides a new comparative analysis of pooled least squares and fixed effects estimators of the slope coefficients in the case of panel data models when the time dimension (T) is fixed while the cross section dimension (N) is allowed to increase without bounds. The individual effects are allowed to be correlated with the regressors, and the comparison is carried out in terms of an exponent coefficient, δ, which measures the degree of pervasiveness of the fixed effects in the panel. It is shown that the pooled estimator remains consistent so long as δ < 1, and is asymptotically normally distributed if δ < 1/2, for a fixed T and as N → ∞. It is further shown that when δ < 1/2, the pooled estimator is more efficient than the fixed effects estimator. Monte Carlo evidence provided supports the main theoretical findings and gives some indications of gains to be made from pooling when δ < 1/2. The problem of how to estimate δ in short T panels is not considered in this paper.

Keywords: short panel, fixed effects estimator, pooled estimator, efficiency

JEL Classification: C010, C230, C330

Suggested Citation

Pesaran, M. Hashem and Zhou, Qiankun, To Pool or Not to Pool: Revisited (June 29, 2015). CESifo Working Paper Series No. 5410, Available at SSRN: https://ssrn.com/abstract=2627075

M. Hashem Pesaran (Contact Author)

University of Southern California - Department of Economics

3620 South Vermont Ave. Kaprielian (KAP) Hall 300
Los Angeles, CA 90089
United States

University of Cambridge - Trinity College (Cambridge) ( email )

United Kingdom

Qiankun Zhou

University of Southern California ( email )

2250 Alcazar Street
Los Angeles, CA 90089
United States

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