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Random Effects Linear Model - Econometric Analysis of Panel Data - Lecture Slides, Slides of Econometrics and Mathematical Economics

Random Effects Linear Model, Error Components Model, Notation, Regression Model Orthogonality, Convergence of Moments, Mechanics, Cornwell and Rupert Data, Feasible GLS are points which describes this lecture importance in Econometric Analysis of Panel Data course.

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Econometric Analysis of Panel Data
5. Random Effects Linear Model
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Download Random Effects Linear Model - Econometric Analysis of Panel Data - Lecture Slides and more Slides Econometrics and Mathematical Economics in PDF only on Docsity!

Econometric Analysis of Panel Data

5. Random Effects Linear Model

The Random Effects Model

 The random effects model

 c i is uncorrelated with x it for all t;

 E[c (^) i | X i ] = 0  E[εit| X i ,c (^) i ]=

it it i it i i i i i i i i i i i i Ni=1 i 1 2 N

y = +c +ε , observation for person i at time t = +c + , T observations in group i = + + , note (c , c ,...,c ) = + + , T observations in the sample c=( , ,... ) ,

= ′ Σ ′ ′ ′ ′

x β y X β i ε X β c ε c y Xβ c ε c c c ΣNi=1 T by 1 vectori

Notation

1 1 1 2 2 2 N N N i

u T observations u T observations u T observations = + + T observations = +

          (^) =   (^) +   (^) +          Σ

1 1 1 2 2 2 N N N Ni=

y X ε i y X (^) β ε i y X ε i Xβ ε u Xβ w In all that fo

    

′ ′

i it it

llows, except where explicitly noted, X, X and x contain a constant term as the first element. To avoid notational clutter, in those cases, x etc. will simply denote the counterpart without the constant term. Use of the symbol K for the number of variables will thus be context specific but will usually include the constant term.

Notation

(^2) u (^2) u (^2) u 2 u^2 2 u^2 u^2 i i u^2 u^2 2 u^2 (^2) u (^2) i i (^2) u 2 i 1 2 N

Var[ +u ]

= T T

=

Var[ | ]

 (^) +  = ^ +     + 

  • ′ ×

 =  

i i

T T

ε i

I ii I ii Ω Ω 0 0 w X^0 Ω^0 0 0 Ω

      

      

ε ε ε ε ε

σ σ σ σ σ σ σ σ σ σ σ σ σ σ σ σ

i

(Note these differ only in the dimension T )

   

Convergence of Moments

N^ Ni 1 i i 1 i N Ni 1 i i 1 i Ni 1 i (^) u Ni 1 i i

T f^ T a weighted sum of individual moment matrices

T f^ T a weighted sum of individual moment matrices = f (^) T f

Note asymptoti

=^ =

= = = =

′ (^) = Σ ′ = Σ ′ (^) = Σ ′ = Σ Σ ′^ + Σ ′

i i

i i i

(^2) ii i (^2) i i

X X X X

X ΩX X Ω X

X X (^) x x σ ε σ

i i

i

cs are with respect to N. Each matrix (^) T is the

moments for the T observations. Should be 'well behaved' in micro level data. The average of N such matrices should be likewise. T or T is assum

X X^ ′ ii i

ed to be fixed (and small).

Random vs. Fixed Effects

 Random Effects

 Small number of parameters

 Efficient estimation

 Objectionable orthogonality assumption (c i ⊥ X i)

 Fixed Effects

 Robust – generally consistent

 Large number of parameters

Estimating the Variance for OLS

1 1 Ni 1 (^) i Ni 1 (^) i Ni 1 (^) i Ni 1 i

N Ni 1 i i 1 i

N Ni 1 i i 1 i

Var[ | ] (^) T T T T

T f^ T , where^ =^ =E[^ |^ ] In the spirit of the White estimator, use f ˆ^ ˆ^ , ˆ T T

− − = = = =

= =

= =

= ^ ′^ ^ ^ ′^  ^ ′  Σ ^ Σ ^  Σ (^)  ^ Σ  ′ (^) = Σ ′ ′ Σ

′ (^) = Σ ′^ ′ Σ

i i i i i i i

i i i i i

b X^1 X X^ X^ ΩX^ X X X ΩX X^ Ω X Ω w w X

X ΩX X w w X w =

Hypothesis tests are then based on Wald statistics.

y - X b i i

THIS IS THE 'CLUSTER' ESTIMATOR

Mechanics

1 ( Ni 1 ) 1

i i

Est.Var[ | ] ˆ ˆ

ˆ = set of T OLS residuals for individual i. = T xK data on exogenous variable for individual i. ˆ = K x 1 vector of products ( ˆ^ )( ˆ )

− − = (^)  ′^  Σ= ′^ ′^  ′  ′

′ ′ ′ (^) =

i i i i i i i i i i i i

b X X X X w w X X X w X X w X w w X

( (^ ) (^ ))

Ni 1 Ni 1 Ni 1

KxK matrix (rank 1, outer product) ˆ ˆ (^) = sum of N rank 1 matrices. Rank K. We could compute this as ˆ^ ˆ = ˆ. Why not do it that way?

= = =

Σ ′^ ′ ≤ Σ ′^ ′^ Σ ′

i i i i i i i i i i i

X w w X X w w X X Ω X

OLS Results

+----------------------------------------------------+| Residuals Sum of squares = 522.2008 | || (^) Fit Standard errorR-squared of e == .3544712.4112099 || |+----------------------------------------------------+ Adjusted R-squared = .4100766 | +---------+--------------+----------------+--------+---------+----------+|Variable | Coefficient | Standard Error |b/St.Er.|P[|Z|>z] | Mean of X| +---------+--------------+----------------+--------+---------+----------+Constant 5.40159723 .04838934 111.628. EXPEXPSQ (^) -.00068788.04084968 (^) .480428D-04.00218534 (^) -14.31818.693 .0000.0000 (^) 514.40504219. OCCSMSA -.13830480.14856267 .01480107.01206772 -9.34412.311 .0000.0000 .51116447. MSFEM (^) -.40020215.06798358 .02074599.02526118 (^) -15.8433.277 .0010.0000 .81440576. UNIONED .09409925.05812166 .01253203.00260039 (^) 22.3517.509 .0000.0000 (^) 12.8453782.

Alternative Variance Estimators

  • +---------+--------------+----------------+--------+---------+Constant 5.40159723 .04838934 111.628. +---------+--------------+----------------+--------+---------+|Variable | Coefficient | Standard Error |b/St.Er.|P[|Z|>z] |
    • EXPEXPSQ -.00068788.04084968 .480428D-04.00218534 -14.31818.693 .0000.
    • OCCSMSA -.13830480.14856267 .01480107.01206772 -9.34412.311 .0000.
    • MSFEM -.40020215.06798358 .02074599.02526118 -15.8433.277 .0010.
    • UNIONED .09409925.05812166 .01253203.00260039 22.3517.509 .0000.
  • RobustConstant 5.40159723 .10156038 53.186.
    • EXPEXPSQ -.00068788.04084968 .983981D-04.00432272 -6.9919.450 .0000.
    • OCCSMSA -.13830480.14856267 .02772631.02423668 -4.9886.130 .0000.
    • MSFEM -.40020215.06798358 .04382220.04961926 -8.0651.551 .1208.
    • UNIONED .09409925.05812166 .02422669.00555697 10.4593.884 .0001.

Panel Data Algebra (1) (^2) ε (^2) u i i (^2) ε (^2 2) u (^2) ε (^2) ε (^2) ε

(^2) ε

= σ +σ , depends on 'i' because it is T T = σ [ ], = σ / σ = σ [ ] = σ [ ], = , =. Using (A-66) in Greene (p. 822) 1 1 σ 1+ =

′ ×

ρ ′ ρ ρ ′^ + ′ ρ

= ^ ′ 

i i^2 i^2

-1i -1 (^) -1 -1 -

Ω I ii Ω I + ii Ω I + ii A bb A I b i

Ω A - (^) b A b A bb A

(^2 2) u (^2) ε i 2 2 ε 2 ε i 2 u

(^1 1) = 1 σ σ 1+T σ σ +Tσ

 (^) ρ ′   (^) ′  (^) ρ       

I - ii I - ii

Panel Data Algebra (2)

(^2) ε 2 u (^2) ε i 2 u (^2) ε i u 2 (^2) ε i 2 u (^2) ε i 2 u i 2 ε 2 ε i 2 u (^2) ε i 2 u (^2) ε

(Based on Wooldridge p. 286) σ +σ σ +Tσ σ +Tσ σ +Tσ ( ) (σ +Tσ )[ ( )], = σ /(σ +Tσ ) (σ +Tσ )[ ] (σ

= ′^ = ′^ ′= = − = + η − η = + η =

i -1^ Di iD Di^ Di Di^ Di

Ω I ii I i(i i) i I P I I M P I P P M i 2 u (^1) i 1 / 2 i i i i i a ai

+Tσ ) (1 / ) (Prove by multiplying. .) (1 / ) 1 , =1- 1 (Note )

− −

= + η = = + η = (^) − θ ^ − θ  θ η = + η

i i Di^ iD^ Di^ iD i Di^ Di^ Di i Di^ iD

S S P M P M 0

S P M I P

S P M

GLS (cont.)

it it i i it it i i

i (^2 ) i u 2

GLS is equivalent to OLS regression of

y * y y. on * .,

where 1 T

Asy.Var[ ˆ] [ ] [ ]

ε ε

ε

= − θ = − θ σ θ = − σ + σ

= ′^ -1^ -1^ = σ ′ -

x x x

β X Ω X X * X*

Estimators for the Variances

i i

it it i OLS Ni 1 Tt 1 (^) it 2 Ni 1 (^) t 1T 2 U 2 (^2 2 2) U i LSDV i

y u With a consistent estimator of , say , (y ) estimates ( ) Divide by something to estimate = With the LSDV estimates, a and ,

= = = = ε ε

=

= ′ + ε +

Σ Σ ′ Σ Σ σ + σ σ σ + σ

it

it

x β β b

- x b

b

N 1 Tt 1 i (^) it 2 Ni 1 Tt 1i 2 2 (^2) U (^2 2) U 2

(y a ) estimates Divide by something to estimate Estimate with ( ) - (^) ˆ.

= = = ε ε ε ε

Σ ′ Σ Σ σ σ σ σ + σ σ

- (^) i - x bit