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Inference on Time-Invariant Variables using Panel Data: A Pre-Test Estimator with an Application to the Returns to Schooling

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Author Info

  • Jean-Bernard Chatelain

    ()
    (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Paris I - Panthéon-Sorbonne)

  • Kirsten Ralf

    ()
    (PSE - Paris-Jourdan Sciences Economiques - CNRS : UMR8545 - École des Hautes Études en Sciences Sociales (EHESS) - École des Ponts ParisTech (ENPC) - École normale supérieure [ENS] - Paris)

Abstract

This paper proposes a new pre-test estimator of panel data models including time invariant variables based upon the Mundlak-Krishnakumar estimator and an "unrestricted” Hausman-Taylor estimator. The paper evaluates the biases of currently used restricted estimators, omitting the average-over-time of at least one endogenous time-varying explanatory variable. Repeated Between, Ordinary Least Squares, Two stage restricted Between and Oaxaca-Geisler estimator, Fixed Effect Vector Decomposition, Generalized least squares may lead to wrong conclusions regarding the statistical significance of the estimated parameter values of time-invariant variables.

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Bibliographic Info

Paper provided by HAL in its series PSE Working Papers with number hal-00492039.

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Date of creation: 15 Jan 2010
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Handle: RePEc:hal:psewpa:hal-00492039

Note: View the original document on HAL open archive server: http://hal-paris1.archives-ouvertes.fr/hal-00492039
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Related research

Keywords: Time-Invariant Variables; Panel data; Time-Series Cross-Sections; Pre-Test Estimator; Mundlak Estimator; Fixed Effects Vector Decomposition;

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References

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  1. Oaxaca, Ronald L. & Geisler, Iris, 2003. "Fixed effects models with time invariant variables: a theoretical note," Economics Letters, Elsevier, Elsevier, vol. 80(3), pages 373-377, September.
  2. Beck, Nathaniel & Katz, Jonathan N., 2001. "Throwing Out the Baby with the Bath Water: A Comment on Green, Kim, and Yoon," International Organization, Cambridge University Press, Cambridge University Press, vol. 55(02), pages 487-495, March.
  3. J. A. Hausman & W. E. Taylor, 1980. "Panel Data and Unobservable Individual Effects," Working papers, Massachusetts Institute of Technology (MIT), Department of Economics 255, Massachusetts Institute of Technology (MIT), Department of Economics.
  4. Jaya Krishnakumar, 2003. "Time Invariant Variables and Panel Data Models : A Generalised Frisch-Vaugh Theorem and its Implications," Research Papers by the Institute of Economics and Econometrics, Geneva School of Economics and Management, University of Geneva, Institut d'Economie et Econométrie, Université de Genève 2004.01, Institut d'Economie et Econométrie, Université de Genève.
  5. Chamberlain, Gary, 1982. "Multivariate regression models for panel data," Journal of Econometrics, Elsevier, Elsevier, vol. 18(1), pages 5-46, January.
  6. Timo Mitze, 2009. "Endogeneity in Panel Data Models with Time-Varying and Time-Fixed Regressors: To IV or not IV?," Ruhr Economic Papers, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen 0083, Rheinisch-Westfälisches Institut für Wirtschaftsforschung, Ruhr-Universität Bochum, Universität Dortmund, Universität Duisburg-Essen.
  7. Hsiao,Cheng, 2003. "Analysis of Panel Data," Cambridge Books, Cambridge University Press, Cambridge University Press, number 9780521522717.
  8. Cameron,A. Colin & Trivedi,Pravin K., 2005. "Microeconometrics," Cambridge Books, Cambridge University Press, Cambridge University Press, number 9780521848053.
  9. Mundlak, Yair, 1978. "On the Pooling of Time Series and Cross Section Data," Econometrica, Econometric Society, Econometric Society, vol. 46(1), pages 69-85, January.
  10. Baltagi, Badi H & Khanti-Akom, Sophon, 1990. "On Efficient Estimation with Panel Data: An Empirical Comparison of Instrumental Variables Estimators," Journal of Applied Econometrics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 5(4), pages 401-06, Oct.-Dec..
  11. Kelejian, Harry H & Stephan, Scott W, 1983. "Inference in Random Coefficient Panel Data Models: A Correction and Clarification of the Literature," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 24(1), pages 249-54, February.
  12. Swamy, P A V B & Arora, S S, 1972. "The Exact Finite Sample Properties of the Estimators of Coefficients in the Error Components Regression Models," Econometrica, Econometric Society, Econometric Society, vol. 40(2), pages 261-75, March.
  13. Boumahdi, Rachid & Thomas, Alban, 2006. "Instrument relevance and efficient estimation with panel data," Economics Letters, Elsevier, Elsevier, vol. 93(2), pages 305-310, November.
  14. Baltagi, Badi H. & Bresson, Georges & Pirotte, Alain, 2003. "Fixed effects, random effects or Hausman-Taylor?: A pretest estimator," Economics Letters, Elsevier, Elsevier, vol. 79(3), pages 361-369, June.
  15. Breusch, Trevor & Ward, Michael B & Nguyen, Hoa & Kompas, Tom, 2010. "On the fixed-effects vector decomposition," MPRA Paper 21452, University Library of Munich, Germany.
  16. Michael C. Lovell, 1963. "Seasonal Adjustment of Economic Time Series and Multiple Regression," Cowles Foundation Discussion Papers, Cowles Foundation for Research in Economics, Yale University 151, Cowles Foundation for Research in Economics, Yale University.
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Citations

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Cited by:
  1. Farla, Kristine, 2012. "Institutions and credit," MERIT Working Papers 038, United Nations University - Maastricht Economic and Social Research Institute on Innovation and Technology (MERIT).
  2. Chatelain, Jean-Bernard & Ralf, Kirsten, 2014. "Spurious regressions and near-multicollinearity, with an application to aid, policies and growth," Journal of Macroeconomics, Elsevier, Elsevier, vol. 39(PA), pages 85-96.

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