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Bias Correction in Panel Data Models with Individual Specific Parameters

  • Ivan Fernandez-Val

    ()

    (Department of Economics, Boston University)

In random coefficients linear IV models, fixed effects averages of the random coefficients are biased in short panels due to the finite-sample bias of IV estimators. This paper introduces a new class of bias-corrected fixed effects estimators for panel data models where the response to the regressors can be individual-specific in an unrestricted fashion. These estimators are based on moment conditions that can be nonlinear functions in parameters and variables, encompassing both linear and nonlinear random coe±cients models and allowing for the presence of endogenous regressors. The corrections are derived from large-T expansions of the finite-sample bias, and reduce the order of this bias from O(T¡1) to O(T¡2) for model parameters and other quantities of interest, such as averages of the individual-specific coefficients. The asymptotic distribution of the bias-corrected estimators are centered at the true parameter values under asymptotic sequences where n = o(T3). In a Monte Carlo example for a linear IV model with both common and individual-specific coefficients, I find that estimators that do not account for parameter heterogeneity can be severely biased, and that bias corrections are effective in reducing the bias of fixed effects estimates. These methods are illustrated through an analysis of earnings equations for young men allowing the effect of the union status to be different for each individual. The results suggest the presence of important heterogeneity in the union premium.

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Paper provided by Boston University - Department of Economics in its series Boston University - Department of Economics - Working Papers Series with number WP2005-041.

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Length: 98 pages
Date of creation: Oct 2005
Date of revision:
Handle: RePEc:bos:wpaper:wp2005-041
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  1. Jawwad Noor, 2005. "Temptation, Welfare and Revealed Preference," Boston University - Department of Economics - Working Papers Series WP2005-15, Boston University - Department of Economics.
  2. Eddie Dekel, 1997. "A Unique Subjective State Space for Unforeseen Contingencies," Discussion Papers 1202, Northwestern University, Center for Mathematical Studies in Economics and Management Science.
  3. Kopylov Igor, 2009. "Temptations in General Settings," The B.E. Journal of Theoretical Economics, De Gruyter, vol. 9(1), pages 1-25, September.
  4. repec:ubc:bricol:90-03 is not listed on IDEAS
  5. Faruk Gul & Wolfgang Pesendorfer, 2001. "Temptation and Self-Control," Econometrica, Econometric Society, vol. 69(6), pages 1403-1435, November.
  6. Machina, Mark J, 1989. "Dynamic Consistency and Non-expected Utility Models of Choice under Uncertainty," Journal of Economic Literature, American Economic Association, vol. 27(4), pages 1622-68, December.
  7. Todd Sarver, 2008. "Anticipating Regret: Why Fewer Options May Be Better," Econometrica, Econometric Society, vol. 76(2), pages 263-305, 03.
  8. Eddie eckel & Barton L Lipman & Aldo Rustichini & Todd Sarver, 2005. "Representing Preferences with a Unique Subjective State Space: Corrigendum," Boston University - Department of Economics - Working Papers Series WP2005-042, Boston University - Department of Economics.
  9. John C. Harsanyi, 1955. "Cardinal Welfare, Individualistic Ethics, and Interpersonal Comparisons of Utility," Journal of Political Economy, University of Chicago Press, vol. 63, pages 309.
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