Identification and (Fast) Estimation of Large Nonlinear Panel Models with Two-Way Fixed Effects

75 Pages Posted: 12 Aug 2022 Last revised: 21 Apr 2023

See all articles by Martin Mugnier

Martin Mugnier

Institut Polytechnique de Paris

Ao Wang

Department of Economics, University of Warwick

Date Written: August 9, 2022

Abstract

We study a nonlinear two-way fixed effects panel model that allows for unobserved individual heterogeneity in slopes and flexibly specified link function. The former is relevant when the researcher is interested in the distributional causal effects of covariates, and the latter mitigates potential misspecification errors due to restrictions imposed on the link function. We show that the fixed effects parameters and the link function can be identified when both individual and time dimensions are large. We propose a novel iterative Gauss-Seidel estimation procedure that overcomes the practical challenge of dimensionality in the number of fixed effects when the dataset is large. We revisit two empirical studies in trade (Helpman et al., 2008) and innovation (Aghion et al., 2013), and find non-negligible unobserved dispersion in trade elasticity across countries and the effect of institutional ownership on innovation across firms. These exercises emphasize the usefulness of our method in capturing flexible heterogeneity in the causal relationship of interest that may have important implications for the subsequent policy analysis.

Keywords: Nonlinear Panel Model, Fixed Effects, Slope Heterogeneity, Gauss-Seidel, Large Dataset

JEL Classification: C23, C24, C25

Suggested Citation

Mugnier, Martin and Wang, Ao, Identification and (Fast) Estimation of Large Nonlinear Panel Models with Two-Way Fixed Effects (August 9, 2022). Available at SSRN: https://ssrn.com/abstract=4186349 or http://dx.doi.org/10.2139/ssrn.4186349

Martin Mugnier

Institut Polytechnique de Paris

Ao Wang (Contact Author)

Department of Economics, University of Warwick ( email )

The Social Sciences Building,
The University of Warwick
Coventry, CV4 7AL
United Kingdom

HOME PAGE: http://https://sites.google.com/view/aowang-economics

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
231
Abstract Views
942
Rank
247,313
PlumX Metrics