Are Fixed Effects Fixed?
In attempts to overcome the problem of omitted variables, the assumption of fixed effects is widely implemented when working with panel data. This paper examines the validity of this technique, in the context of estimating a production function using panels of US textile plants. The hypothesis of fixed effects is tested by estimating a more flexible functional form for the error term's components than is found in the literature. It is shown that what looks loke a "fixed effect" is actually decaying slowly.
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