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FEVD: Just IV or Just Mistaken?

Author

Listed:
  • Trevor Breusch
  • Michael B. Ward
  • Hoa Thi Minh Nguyen
  • Tom Kompas

Abstract

Fixed effects vector decomposition (FEVD) is simply an instrumental variables (IV) estimator with a particular choice of instruments and a special case of the well-known Hausman-Taylor IV procedure. Plümper and Troeger (PT) now acknowledge this point and disown the three-stage procedure that previously defined FEVD. Their old recipe for standard errors, which has regrettably been used in dozens of published research papers, produces dramatic overconfidence in the estimates. Again PT concede the point and now adopt the standard IV formula for standard errors. Knowing that FEVD is an application of IV also has the benefit of focusing attention on the choice of instruments. Now it seems PT claim that the FEVD instruments are always the best choice, on the grounds that one cannot know whether any potential instrument is correlated with the unit effect. One could just as readily make the same specious claim about other estimators, such as ordinary least squares, and support it with similar Monte Carlo assumptions and evidence.

Suggested Citation

  • Trevor Breusch & Michael B. Ward & Hoa Thi Minh Nguyen & Tom Kompas, 2011. "FEVD: Just IV or Just Mistaken?," Monash Economics Working Papers archive-17, Monash University, Department of Economics.
    • Handle: RePEc:mos:moswps:archive-17
    DOI: 10.1093/pan/mpr012
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