Fixed-effects Estimation and Decomposition: Insights from Monte Carlo Studies

In the presence of more readily available panel data the question arises whether standard decomposition techniques can be applied in the same spirit as in cross-section data. Monte Carlo studies show that employing a simple decomposition into explained and unexplained parts in the presence of time-invariant regressors using fixed-effects estimation will yield biased and inconsistent results. It is shown that this is not the case if the means in time-invariant variables of the respective groups are equal. Hence, it is argued that standard decomposition techniques are only transferable to fixed-effects estimation under certain stricter assumptions which are testable. This talk will outline these arguments, and discuss how the various decomposition techniques can be implemented in Stata.