IDEAS home Printed from https://ideas.repec.org/p/ste/nystbu/10-04.html

Fixed Effects Vector Decomposition: A Magical Solution to the Problem of Time Invariant Variables in Fixed Effects Models?

Author

Listed:
  • William Greene

Abstract

Plümper and Troeger (2007) propose a three-step procedure for the estimation of a fixed effects (FE) model that, it is claimed, “provides the most reliable estimates under a wide variety of specifications common to real world data.” Their fixed effects vector decomposition (FEVD) estimator is startlingly simple, involving three simple steps, each requiring nothing more than ordinary least squares (OLS). Large gains in efficiency are claimed for cases of time-invariant and slowly time-varying regressors. A subsequent literature has compared the estimator to other estimators of FE models, including the estimator of Hausman and Taylor (1981) also (apparently) with impressive gains in efficiency. The article also claims to provide an efficient estimator for parameters on time-invariant variables (TIVs) in the FE model. None of the claims are correct. The FEVD estimator simply reproduces (identically) the linear FE (dummy variable) estimator then substitutes an inappropriate covariance matrix for the correct one. The consistency result follows from the fact that OLS in the FE model is consistent. The “efficiency” gains are illusory. The claim that the estimator provides an estimator for the coefficients on TIVs in an FE model is also incorrect. That part of the parameter vector remains unidentified. The “estimator” relies upon a strong assumption that turns the FE model into a type of random effects model.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • William Greene, 2010. "Fixed Effects Vector Decomposition: A Magical Solution to the Problem of Time Invariant Variables in Fixed Effects Models?," Working Papers 10-04, New York University, Leonard N. Stern School of Business, Department of Economics.
    • Handle: RePEc:ste:nystbu:10-04
    as

    Download full text from publisher

    File URL: http://w4.stern.nyu.edu/economics/docs/workingpapers/2010/Greene_Comment-FixedEffects.pdf
    Download Restriction: no
    ---><---

    Other versions of this item:

    References listed on IDEAS

    as
    1. Hausman, Jerry A & Taylor, William E, 1981. "Panel Data and Unobservable Individual Effects," Econometrica, Econometric Society, vol. 49(6), pages 1377-1398, November.
    2. Cornwell, Christopher & Rupert, Peter, 1988. "Efficient Estimation with Panel Data: An Empirical Comparison of Instrumental Variables Estimators," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 3(2), pages 149-155, April.
    3. Plümper, Thomas & Troeger, Vera E., 2007. "Efficient Estimation of Time-Invariant and Rarely Changing Variables in Finite Sample Panel Analyses with Unit Fixed Effects," Political Analysis, Cambridge University Press, vol. 15(2), pages 124-139, April.
    4. Saxonhouse, Gary R, 1976. "Estimated Parameters as Dependent Variables," American Economic Review, American Economic Association, vol. 66(1), pages 178-183, March.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Aleksey Oshchepkov & Anna Shirokanova, 2020. "Multilevel Modeling For Economists: Why, When And How," HSE Working papers WP BRP 233/EC/2020, National Research University Higher School of Economics.
    2. Régis BRETON & Sébastien GALANTI & Christophe HURLIN & Anne-Gaël VAUBOURG, 2011. "Does the firm-analyst relationship matter in explaining analysts' earnings forecast errors?," LEO Working Papers / DR LEO 469, Orleans Economics Laboratory / Laboratoire d'Economie d'Orleans (LEO), University of Orleans.
    3. Marcelo José Braga Nonnenberg & Mário Jorge Cardoso de Mendonça, 2004. "Determinantes dos Investimentos Diretos Externos em Países em Desenvolvimento," Discussion Papers 1016, Instituto de Pesquisa Econômica Aplicada - IPEA.
    4. Béatrice D'HOMBRES & Jean-Louis ARCAND, 2006. "Testing for Separation in Agricultural Household Models and Unobservable Household-Specific Effects," Working Papers 200632, CERDI.
    5. Baltagi, Badi H., 2023. "The two-way Hausman and Taylor estimator," Economics Letters, Elsevier, vol. 228(C).
    6. Salvador Gil-Pareja & Rafael Llorca & Josè A. Martinez-Serrano, 2011. "Is There A Continental Bias In Trade?," ERSA conference papers ersa10p792, European Regional Science Association.
    7. Eduardo Fé, 2012. "Instrumental variable estimation of heteroskedasticity adaptive error component models," Statistical Papers, Springer, vol. 53(3), pages 577-615, August.
    8. Rainer Schweickert & Inna Melnykovska & Ansgar Belke & Ingo Bordon, 2011. "Prospective NATO or EU membership and institutional change in transition countries," The Economics of Transition, The European Bank for Reconstruction and Development, vol. 19(4), pages 667-692, October.
    9. Yashobanta Parida & Joyita Roy Chowdhury, 2025. "Effects of election and natural disaster mortality on calamity relief spending in India," Economics of Governance, Springer, vol. 26(1), pages 93-138, March.
    10. Eduardo Fé Rodríguez, 2009. "Adaptive Instrumental Variable Estimation of Heteroskedastic Error Component Models," Economics Discussion Paper Series 0921, Economics, The University of Manchester.
    11. Boumahdi, Rachid & Thomas, Alban, 2006. "Instrument relevance and efficient estimation with panel data," Economics Letters, Elsevier, vol. 93(2), pages 305-310, November.
    12. Liang Zhao & Joyce P. Jacobsen, 2006. "Revisiting The Bell Curve Debate Regarding the Effects of Cognitive Ability on Wages," Wesleyan Economics Working Papers 2006-026, Wesleyan University, Department of Economics.
    13. Ahn, Seung C. & Lee, Young H. & Schmidt, Peter, 2013. "Panel data models with multiple time-varying individual effects," Journal of Econometrics, Elsevier, vol. 174(1), pages 1-14.
    14. Martin Andersson & Hans Lööf, 2011. "Agglomeration and productivity: evidence from firm-level data," The Annals of Regional Science, Springer;Western Regional Science Association, vol. 46(3), pages 601-620, June.
    15. Chatelain, Jean-Bernard & Ralf, Kirsten, 2021. "Inference on time-invariant variables using panel data: A pretest estimator," Economic Modelling, Elsevier, vol. 97(C), pages 157-166.
    16. Sebastian Kripfganz & Claudia Schwarz, 2019. "Estimation of linear dynamic panel data models with time‐invariant regressors," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 34(4), pages 526-546, June.
    17. Benoît Maux & Yvon Rocaboy & Timothy Goodspeed, 2011. "Political fragmentation, party ideology and public expenditures," Public Choice, Springer, vol. 147(1), pages 43-67, April.
    18. Jon Nelson & Peter Kennedy, 2009. "The Use (and Abuse) of Meta-Analysis in Environmental and Natural Resource Economics: An Assessment," Environmental & Resource Economics, Springer;European Association of Environmental and Resource Economists, vol. 42(3), pages 345-377, March.
    19. repec:jss:jstsof:27:i02 is not listed on IDEAS
    20. Alderman, Harold & Garcia, Marito, 1992. "Food security and health security : explaining the levels of nutrition in Pakistan," Policy Research Working Paper Series 865, The World Bank.
    21. Alderman, Harold & Garcia, Marito, 1993. "Poverty, Household Food Security, and Nutrition in Rural Pakistan," Research Reports 37963, CGIAR, International Food Policy Research Institute (IFPRI).

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ste:nystbu:10-04. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Amanda Murphy The email address of this maintainer does not seem to be valid anymore. Please ask Amanda Murphy to update the entry or send us the correct address (email available below). General contact details of provider: https://edirc.repec.org/data/ednyuus.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.