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Estimation of linear dynamic panel data models with time-invariant regressors

  • Kripfganz, Sebastian
  • Schwarz, Claudia

This paper considers estimation methods and inference for linear dynamic panel data models with unit-specific heterogeneity and a short time dimension. In particular, we focus on the identification of the coefficients of time-invariant variables in a dynamic version of the Hausman and Taylor (1981) model. We propose a two-stage estimation procedure to identify the effectsof time-invariant regressors. We first estimate the coefficients of the time-varying regressors and subsequently regress the first-stage residuals on the time-invariant regressors to recover the coefficients of the latter. Standard errors are adjusted to take into account the first-stage estimation uncertainty. As potential first-stage estimators we discuss generalized method of moments estimators and the transformed likelihood approach of Hsiao, Pesaran, and Tahmiscioglu (2002). Monte Carlo experiments are used to compare the performance of the two-stage approach to various system GMM estimators that obtain all parameter estimates simultaneously. The results are in favor of the two-stage approach. We provide further simulation evidence that GMM estimators with a large number of instruments can be severely biased in finite samples. Reducing the instrument count by collapsing the instrument matrices strongly improves the results while restricting the lag depth does not. Finally, we estimate a dynamic Mincer equation with data from the Panel Study of Income Dynamics to illustrate the approach.

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Paper provided by Deutsche Bundesbank, Research Centre in its series Discussion Papers with number 25/2013.

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Date of creation: 2013
Date of revision:
Handle: RePEc:zbw:bubdps:252013
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  1. Arellano, Manuel & Bond, Stephen, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Wiley Blackwell, vol. 58(2), pages 277-97, April.
  2. Richard Blundell & Steve Bond, 1995. "Initial conditions and moment restrictions in dynamic panel data models," IFS Working Papers W95/17, Institute for Fiscal Studies.
  3. Mundlak, Yair, 1978. "On the Pooling of Time Series and Cross Section Data," Econometrica, Econometric Society, vol. 46(1), pages 69-85, January.
  4. Corrado Andini, 2010. "A dynamic Mincer equation with an application to Portuguese data," Applied Economics, Taylor & Francis Journals, vol. 42(16), pages 2091-2098.
  5. Arellano, Manuel, 2003. "Panel Data Econometrics," OUP Catalogue, Oxford University Press, number 9780199245291.
  6. Kazuhiko Hayakawa & M. Hashem Pesaran, 2012. "Robust Standard Errors in Transformed Likelihood Estimation of Dynamic Panel Data Models," Working Paper Series 38_12, The Rimini Centre for Economic Analysis.
  7. Maurice Bun & Frank Windmeijer, 2007. "The weak instrument problem of the system GMM estimator in dynamic panel data models," CeMMAP working papers CWP08/07, Centre for Microdata Methods and Practice, Institute for Fiscal Studies.
  8. Jacob A. Mincer, 1974. "Schooling, Experience, and Earnings," NBER Books, National Bureau of Economic Research, Inc, number minc74-1, July.
  9. Corrado Andini, 2007. "Returns to education and wage equations: a dynamic approach," Applied Economics Letters, Taylor & Francis Journals, vol. 14(8), pages 577-579.
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  12. Chamberlain, Gary, 1982. "Multivariate regression models for panel data," Journal of Econometrics, Elsevier, vol. 18(1), pages 5-46, January.
  13. David Roodman, 2007. "A Note on the Theme of Too Many Instruments," Working Papers 125, Center for Global Development.
  14. Amemiya, Takeshi & MaCurdy, Thomas E, 1986. "Instrumental-Variable Estimation of an Error-Components Model," Econometrica, Econometric Society, vol. 54(4), pages 869-80, July.
  15. Hansen, Lars Peter, 1982. "Large Sample Properties of Generalized Method of Moments Estimators," Econometrica, Econometric Society, vol. 50(4), pages 1029-54, July.
  16. Richard Blundell & Steve Bond & Frank Windmeijer, 2000. "Estimation in dynamic panel data models: improving on the performance of the standard GMM estimator," IFS Working Papers W00/12, Institute for Fiscal Studies.
  17. 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.
  18. Andini, Corrado, 2009. "How Fast Do Wages Adjust to Human-Capital Productivity? Dynamic Panel-Data Evidence from Belgium, Denmark and Finland," IZA Discussion Papers 4583, Institute for the Study of Labor (IZA).
  19. Spence, A Michael, 1973. "Job Market Signaling," The Quarterly Journal of Economics, MIT Press, vol. 87(3), pages 355-74, August.
  20. Breusch, Trevor & Ward, Michael B & Nguyen, Hoa & Kompas, Tom, 2010. "On the fixed-effects vector decomposition," MPRA Paper 21452, University Library of Munich, Germany.
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