Efficient Estimation of Time-Invariant and Rarely Changing Variables in Finite Sample Panel Analyses with Unit Fixed Effects

Thomas Plümper; Vera E. Troeger

doi:10.1093/pan/mpm002

journal article Jan 01, 2007

Efficient Estimation of Time-Invariant and Rarely Changing Variables in Finite Sample Panel Analyses with Unit Fixed Effects

Thomas Plümper Vera E. Troeger

Political Analysis Vol. 15 No. 2 pp. 124-139 · Cambridge University Press (CUP)

View at Publisher Save 10.1093/pan/mpm002

Abstract

This paper suggests a three-stage procedure for the estimation of time-invariant and rarely changing variables in panel data models with unit effects. The first stage of the proposed estimator runs a fixed-effects model to obtain the unit effects, the second stage breaks down the unit effects into a part explained by the time-invariant and/or rarely changing variables and an error term, and the third stage reestimates the first stage by pooled OLS (with or without autocorrelation correction and with or without panel-corrected SEs) including the time-invariant variables plus the error term of stage 2, which then accounts for the unexplained part of the unit effects. We use Monte Carlo simulations to compare the finite sample properties of our estimator to the finite sample properties of competing estimators. In doing so, we demonstrate that our proposed technique provides the most reliable estimates under a wide variety of specifications common to real world data.

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We also varied the number of units (N = 15, 30, 50, 70, 100) and the number of time periods (T = 20, 40, 70, 100). We report these results only in the online appendix. The number of possible permutations of these settings is 2000 that would have led to 2000 times the aggregated number of estimators used in both experiments times 1000 single estimations in the Monte Carlo analyses. In total, this would have given 18 million regressions. However, without loss of generality, we simplified the Monte Carlos and estimated “only” 980,000 single regression models.

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We follow standard practice by this notation. However, from equation (4) it follows that the FE estimate of the unit effects propels much more to the estimated unit effects. To avoid confusion and maintain consistence with standard textbooks, we stick to this notation—needless to say that it does not make much sense.

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Details

Published: Jan 01, 2007
Vol/Issue: 15(2)
Pages: 124-139
License: View

Authors

Cite This Article

Thomas Plümper, Vera E. Troeger (2007). Efficient Estimation of Time-Invariant and Rarely Changing Variables in Finite Sample Panel Analyses with Unit Fixed Effects. Political Analysis, 15(2), 124-139. https://doi.org/10.1093/pan/mpm002

Efficient Estimation of Time-Invariant and Rarely Changing Variables in Finite Sample Panel Analyses with Unit Fixed Effects

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