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

  • Hernandez, Monica
  • Pudney, Stephen

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.

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File URL: https://www.iser.essex.ac.uk/research/publications/working-papers/iser/2011-13.pdf
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Paper provided by Institute for Social and Economic Research in its series ISER Working Paper Series with number 2011-13.

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Date of creation: 14 May 2011
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Publication status: published
Handle: RePEc:ese:iserwp:2011-13
Contact details of provider: Postal: Publications Office, Institute for Social and Economic Research, University of Essex, Wivenhoe Park, Colchester, Essex CO4 3SQ UK
Phone: 44-1206-872957
Fax: 44-1206-873151
Web page: https://www.iser.essex.ac.uk/
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  1. 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.
  2. David Roodman, 2007. "A Note on the Theme of Too Many Instruments," Working Papers 125, Center for Global Development.
  3. Cunha, Flavio & Heckman, James J., 2007. "The Technology of Skill Formation," IZA Discussion Papers 2550, Institute for the Study of Labor (IZA).
  4. M Arellano & O Bover, 1990. "Another Look at the Instrumental Variable Estimation of Error-Components Models," CEP Discussion Papers dp0007, Centre for Economic Performance, LSE.
  5. 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 C182-C198, March.
  6. Stephen Pudney, 2010. "Drugs policy: what should we do about cannabis?," Economic Policy, CEPR;CES;MSH, vol. 25, pages 165-211, 01.
  7. James J. Heckman & Jora Stixrud & Sergio Urzua, 2006. "The Effects of Cognitive and Noncognitive Abilities on Labor Market Outcomes and Social Behavior," NBER Working Papers 12006, National Bureau of Economic Research, Inc.
  8. van Ours, J.C., 2001. "Is Cannabis a Stepping Stone for Cocaine?," Discussion Paper 2001-98, Tilburg University, Center for Economic Research.
  9. van Ours, J.C., 2003. "Is cannabis a stepping stone for cocaine?," Other publications TiSEM c1213d1c-a542-4627-938c-7, Tilburg University, School of Economics and Management.
  10. 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.
  11. Jeffrey DeSimone, 1998. "Is Marijuana a Gateway Drug?," Eastern Economic Journal, Eastern Economic Association, vol. 24(2), pages 149-164, Spring.
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