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Second-order corrected likelihood for nonlinear panel models with fixed effects

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  • Dhaene, Geert
  • Sun, Yutao

Abstract

We propose a second-order correction for nonlinear fixed-effect panel models. The correction is made via the log-likelihood function. It removes the two leading terms of the bias of the log-likelihood that arises from estimating the fixed effects. Maximizing the corrected likelihood gives a second-order bias-corrected estimator, with bias OT−3, where T is the number of time periods. The corrected likelihood also gives second-order corrected test statistics. The correction applies to general nonlinear fixed-effect models with independent observations. The bias correction properties are confirmed in simulations for binary-choice models.

Suggested Citation

  • Dhaene, Geert & Sun, Yutao, 2021. "Second-order corrected likelihood for nonlinear panel models with fixed effects," Journal of Econometrics, Elsevier, vol. 220(2), pages 227-252.
    • Handle: RePEc:eee:econom:v:220:y:2021:i:2:p:227-252
    DOI: 10.1016/j.jeconom.2020.04.001
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    References listed on IDEAS

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    More about this item

    Keywords

    Nonlinear panel data models; Fixed effects; Incidental parameter problem; Bias correction;
    All these keywords.

    JEL classification:

    • C23 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables - - - Models with Panel Data; Spatio-temporal Models

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