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Homogeneity Pursuit in Panel Data Models: Theory and Applications

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Abstract

This paper studies estimation of a panel data model with latent structures where individuals can be classified into different groups where slope parameters are homogeneous within the same group but heterogeneous across groups. To identify the unknown group structure of vector parameters, we design an algorithm called Panel-CARDS which is a systematic extension of the CARDS procedure proposed by Ke, Fan, and Wu (2015) in a cross section framework. The extension addresses the problem of comparing vector coefficients in a panel model for homogeneity and introduces a new concept of controlled classification of multidimensional quantities called the segmentation net. We show that the Panel-CARDS method identifies group structure asymptotically and consistently estimates model parameters at the same time. External information on the minimum number of elements within each group is not required but can be used to improve the accuracy of classification and estimation in finite samples. Simulations evaluate performance and corroborate the asymptotic theory in several practical design settings. Two empirical economic applications are considered: one explores the effect of income on democracy by using cross-country data over the period 1961-2000; the other examines the effect of minimum wage legislation on unemployment in 50 states of the United States over the period 1988-2014. Both applications reveal the presence of latent groupings in these panel data.

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  • Wuyi Wang & Peter C.B. Phillips & Liangjun Su, 2016. "Homogeneity Pursuit in Panel Data Models: Theory and Applications," Cowles Foundation Discussion Papers 2063, Cowles Foundation for Research in Economics, Yale University.
  • Handle: RePEc:cwl:cwldpp:2063
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    File URL: http://cowles.yale.edu/sites/default/files/files/pub/d20/d2063.pdf
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    Cited by:

    1. Andreas Dzemski & Ryo Okui, 2017. "Confidence set for group membership," Papers 1801.00332, arXiv.org, revised Mar 2018.

    More about this item

    Keywords

    CARDS; Clustering; Heterogeneous slopes; Income and democracy; Minimum wage and employment; Oracle estimator; Panel structure model;

    JEL classification:

    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models
    • C38 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Classification Methdos; Cluster Analysis; Principal Components; Factor Analysis
    • C51 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Model Construction and Estimation

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