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Bias Corrections for Two-Step Fixed Effects Panel Data Estimators

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  • Fernández-Val, Iván

    ()
    (Boston University)

  • Vella, Francis

    ()
    (Georgetown University)

Abstract

This paper introduces bias-corrected estimators for nonlinear panel data models with both time invariant and time varying heterogeneity. These include limited dependent variable models with both unobserved individual effects and endogenous explanatory variables, and sample selection models with unobserved individual effects. Our two-step approach first estimates the reduced form by fixed effects procedures to obtain estimates of the time variant heterogeneity underlying the endogeneity/selection bias. We then estimate the primary equation by fixed effects including an appropriately constructed control function from the reduced form estimates as an additional explanatory variable. The fixed effects approach in this second step captures the time invariant heterogeneity while the control function accounts for the time varying heterogeneity. Since either or both steps might employ nonlinear fixed effects procedures it is necessary to bias adjust the estimates due to the incidental parameters problem. This problem is exacerbated by the two step nature of the procedure. As these two step approaches are not covered in the existing literature we derive the appropriate correction thereby extending the use of large-T bias adjustments to an important class of models. Simulation evidence indicates our approach works well in finite samples and an empirical example illustrates the applicability of our estimator.

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Bibliographic Info

Paper provided by Institute for the Study of Labor (IZA) in its series IZA Discussion Papers with number 2690.

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Length: 53 pages
Date of creation: Mar 2007
Date of revision:
Publication status: published in: Journal of Econometrics, 2011, 163 (2), 144-162
Handle: RePEc:iza:izadps:dp2690

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Keywords: bias; fixed effects; endogenous regressors; two-step estimation; panel data; union premium;

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Cited by:
  1. Geert Dhaene & Koen Jochmans, 2010. "Split-panel jackknife estimation of fixed-effect models," Sciences Po publications info:hdl:2441/eu4vqp9ompq, Sciences Po.
  2. Georgios Marios Chrysanthou, 2008. "Estimating union wage effects in Great Britain during 1991-2003," Economics Working Papers we082214, Universidad Carlos III, Departamento de Economía.
  3. Michael Beckmann & Thomas Cornelissen, 2014. "Self-Managed Working Time and Employee Effort: Microeconometric Evidence," SOEPpapers on Multidisciplinary Panel Data Research 636, DIW Berlin, The German Socio-Economic Panel (SOEP).
  4. Koen Jochmans, 2014. "Multiplicative-error models with sample selection," Sciences Po publications 2014-05, Sciences Po.
  5. Aysen Isaoglu, 2010. "Worker Reallocation across Occupations in Western Germany," SOEPpapers on Multidisciplinary Panel Data Research 319, DIW Berlin, The German Socio-Economic Panel (SOEP).
  6. Christian Almer & Stefan Boes, 2012. "Climate (change) and conflict: resolving a puzzle of association and causation," Diskussionsschriften, Universitaet Bern, Departement Volkswirtschaft dp1203, Universitaet Bern, Departement Volkswirtschaft.
  7. Almer, Christian & Laurent-Lucchetti, Jérémy & oechslin, Manuel, 2011. "Income shocks and social unrest: theory and evidence," MPRA Paper 34426, University Library of Munich, Germany.
  8. Panutat Satchachai & Peter Schmidt, 2010. "Estimates of technical inefficiency in stochastic frontier models with panel data: generalized panel jackknife estimation," Journal of Productivity Analysis, Springer, Springer, vol. 34(2), pages 83-97, October.

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