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Finite Mixture for Panels with Fixed Effects

This paper develops finite mixture models with fixed effects for two families of distributions for which the incidental parameter problem has a solution. Analytical results are provided for mixtures of Normals and mixtures of Poisson. We provide algorithms based on the expectations-maximization (EM) approach as well as computationally simpler equivalent estimators that can be used in the case of the mixtures of normals. We design and implement a Monte Carlo study that examines the finite sample performance of the proposed estimator and also compares it with other estimators such the Mundlak-Chamberlain conditionally correlated random effects estimator. The results of Monte Carlo experiments suggest that our proposed estimators of such models have excellent finite sample properties, even in the case of relatively small T and moderately sized N dimensions. The methods are applied to models of healthcare expenditures and counts of utilization using data from the Health and Retirement Study.

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File URL: http://econ.hunter.cuny.edu/wp-content/uploads/sites/6/RePEc/papers/HunterEconWP432.pdf
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Paper provided by Hunter College Department of Economics in its series Economics Working Paper Archive at Hunter College with number 432.

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Length: 32 pages
Date of creation: 2011
Date of revision:
Handle: RePEc:htr:hcecon:432
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  1. Lancaster, Tony, 2000. "The incidental parameter problem since 1948," Journal of Econometrics, Elsevier, vol. 95(2), pages 391-413, April.
  2. Mundlak, Yair, 1978. "On the Pooling of Time Series and Cross Section Data," Econometrica, Econometric Society, vol. 46(1), pages 69-85, January.
  3. Partha Deb & Karen Smith Conway, 2002. "Is Prenatal Care Really Ineffective? Or, is the 'Devil' in the Distribution?," Economics Working Paper Archive at Hunter College 02/2, Hunter College Department of Economics.
  4. Anders Skrondal & Sophia Rabe-Hesketh, 2007. "Latent Variable Modelling: A Survey," Scandinavian Journal of Statistics, Danish Society for Theoretical Statistics;Finnish Statistical Society;Norwegian Statistical Association;Swedish Statistical Association, vol. 34(4), pages 712-745.
  5. Deb, Partha & Trivedi, Pravin K, 1997. "Demand for Medical Care by the Elderly: A Finite Mixture Approach," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 12(3), pages 313-36, May-June.
  6. David Card & Carlos Dobkin & Nicole Maestas, 2004. "The Impact of Nearly Universal Insurance Coverage on Health Care Utilization and Health: Evidence from Medicare," NBER Working Papers 10365, National Bureau of Economic Research, Inc.
  7. Jeffrey M Wooldridge, 2002. "Simple solutions to the initial conditions problem in dynamic, nonlinear panel data models with unobserved heterogeneity," CeMMAP working papers CWP18/02, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
  8. Deb, Partha & Trivedi, Pravin K., 2002. "The structure of demand for health care: latent class versus two-part models," Journal of Health Economics, Elsevier, vol. 21(4), pages 601-625, July.
  9. Smith, James P, 1998. "Socioeconomic Status and Health," American Economic Review, American Economic Association, vol. 88(2), pages 192-96, May.
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