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What you don't see can't hurt you? Panel data analysis and the dynamics of unobservable factors

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  • Hernandez, Monica
  • Pudney, Stephen

Abstract

We investigate the consequences of using time-invariant individual effects in panel data models when the unobservables are in fact time-varying. Using data from the British Offending Crime and Justice panel, we estimate a dynamic factor model of the occurrence of a range of illicit activities as outcomes of young people's development processes. This structure is then used to demonstrate that relying on the assumption of time-invariant individual effects to deal with confounding factors in a conventional dynamic panel data model is likely to lead to spurious "gateway" effects linking cannabis use to subsequent hard drug use.

Suggested Citation

  • Hernandez, Monica & Pudney, Stephen, 2011. "What you don't see can't hurt you? Panel data analysis and the dynamics of unobservable factors," ISER Working Paper Series 2011-13, Institute for Social and Economic Research.
  • Handle: RePEc:ese:iserwp:2011-13
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    File URL: https://www.iser.essex.ac.uk/research/publications/working-papers/iser/2011-13.pdf
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    References listed on IDEAS

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    1. Stephen Pudney, 2003. "The Road to Ruin? Sequences of Initiation to Drugs and Crime in Britain," Economic Journal, Royal Economic Society, vol. 113(486), pages 182-198, March.
    2. Arellano, Manuel & Bover, Olympia, 1995. "Another look at the instrumental variable estimation of error-components models," Journal of Econometrics, Elsevier, vol. 68(1), pages 29-51, July.
    3. James Heckman & Flavio Cunha, 2007. "The Technology of Skill Formation," American Economic Review, American Economic Association, vol. 97(2), pages 31-47, May.
    4. van Ours, Jan C., 2003. "Is cannabis a stepping-stone for cocaine?," Journal of Health Economics, Elsevier, vol. 22(4), pages 539-554, July.
    5. Stephen Pudney, 2010. "Drugs policy: what should we do about cannabis?," Economic Policy, CEPR;CES;MSH, vol. 25, pages 165-211, January.
    6. James J. Heckman & Jora Stixrud & Sergio Urzua, 2006. "The Effects of Cognitive and Noncognitive Abilities on Labor Market Outcomes and Social Behavior," Journal of Labor Economics, University of Chicago Press, vol. 24(3), pages 411-482, July.
    7. Goffe, William L. & Ferrier, Gary D. & Rogers, John, 1994. "Global optimization of statistical functions with simulated annealing," Journal of Econometrics, Elsevier, vol. 60(1-2), pages 65-99.
    8. Jeffrey DeSimone, 1998. "Is Marijuana a Gateway Drug?," Eastern Economic Journal, Eastern Economic Association, vol. 24(2), pages 149-164, Spring.
    9. David Roodman, 2009. "A Note on the Theme of Too Many Instruments," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 71(1), pages 135-158, February.
    10. Windmeijer, Frank, 2005. "A finite sample correction for the variance of linear efficient two-step GMM estimators," Journal of Econometrics, Elsevier, vol. 126(1), pages 25-51, May.
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    Cited by:

    1. Pudney, Stephen & Bryan, Mark & DelBono, Emilia, 2013. "Licensing and regulation of the cannabis market in England and Wales: Towards a cost-benefit analysis," MPRA Paper 50365, University Library of Munich, Germany.

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