To Pool or Not to Pool: Revisited
22 Pages Posted: 6 Jul 2015
Date Written: June 29, 2015
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: Suggested Citation