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From |
Giovanni Bruno <giovanni.bruno@uni-bocconi.it> |

To |
statalist@hsphsun2.harvard.edu |

Subject |
Re: st: dynamic short panel |

Date |
Thu, 29 Sep 2005 11:17:58 +0200 |

sistoand80 <sistoand80@libero.it>: > Dear Dr. Bruno, > I'm Andrea Sisto, a PHD student in Economics at the Univeristy of Turin. As > I'm working with Prof. Zanola, I thank you also on behalf of Roberto. Our > problem is that we have to account for heterogeneity in panel. This > heterogeneity should be captured introducing cross-section dummy variable. > But standard GMM DP estimators drop individual effect with first-difference. > For ivreg2, the question was whether a FE2SLS, with a model in level with > Cross section dummy variables, was a correct way to deal with dynamic panel > (our strategy was to simply instrument the dependent variable with some > exogenous instruments). > Thank you for your suggestion > AS Careful here. Time invariant individual heterogeneity is typically accommodated either 1) by adding individual dummies, which boils down to transforming variables in deviations from the group means; or 2) by first-differencing. So at the end of the day, *both* methods actually do the same job of purging the regression from unobserved individual heterogeneity. First-differencing is held as a more convenient transformation in dynamic panel data models since under conventional assumptions on the var-cov matrix of disturbances in levels first-differenced disturbances are not correlated to past realizations of the dependent variable, which can be used as instruments. A reason not to do that is a non-spherical var-cov matrix of disturbances in levels, e.g. due to within-group serial correlation. In this case, lagged values of y may not be used as instruments, but lags (and leads) of strictly exogenous explanatory variables can always be exploited to identify the relationship of interest (in levels or first-differences) and -ivreg2- can certainly take care of all estimation issues. Nevertheless, such IV estimators might have poor finite sample performances. Useful readings are the first part of the Arellano-Honore (2001) chapter or the Arellano (2003) manual. Arellano, M. 2003. Panel Data Econometrics. Oxford: Oxford University Press Arellano, M. and B. Honorè, 2001. Panel Data Models: Some Recent Developments. In Handbook of Econometrics vol. 5 ed. J.J. Heckman and E. Leamer. Amsterdam: Elsevier Giovanni > > > > > > > Roberto Zanola <zanola@sp.unipmn.it>: > > > > > Dear all, > > > we need to estimate a dynamic short panel (T=6 and N=20). Two > possibilities: > > > (1) lsdvc > > > > This is implemented in Stata by the user written code -xtlsdvc-. > > It behaves relatively better than IV-GMM estimators in small panel > > data-sets, in terms of both bias and root mean squared error, > > but needs strictly exogeneity of regressors and neither > > heteroskedasticity or serial correlation of disturbances. > > > > > (2) ivreg2 with dummies > > > > I'm not clear what estimator Roberto has in mind in this > > case. -ivreg2- is a flexible routine that can implement many > > IV estimators and tests, and clearly not all of them are appropriate > > methods for dynamic models. A simple N-consistent estimator for > > dynamic panel data models that can be supported by -ivreg2- is that > > developed by Anderson and Hsiao (1982). It is carried out by taking > > variables in first-differences and using the dependent variable > > lagged two times, y(t-2), as an instrument for Dy(t-1). One can > > also deal with endogenous x's in this case, provided valid instruments > > are available. However, Monte Carlo evidence demonstrates that the AH > > estimator, although virtually unbiased, is rather imprecise in > > small samples (very large root mean squared error). > > > > References > > Anderson, T. W. and C. Hsiao. 1982. Formulation and Estimation > > of Dynamic Models Using Panel Data. Journal of Econometrics > > 18: 570–606 > > > > Roberto may also find it useful my paper on small panel data-sets, > > downloadable from > > > > http://ideas.repec.org/p/cri/cespri/wp165.html > > > > > > Giovanni > > (author of -xtlsdvc-) > > > > > > > > * > > > * For searches and help try: > > > * http://www.stata.com/support/faqs/res/findit.html > > > * http://www.stata.com/support/statalist/faq > > > * http://www.ats.ucla.edu/stat/stata/ > > > > > > > > > -- > > Giovanni S.F. Bruno > > http://ideas.repec.org/e/pbr136.html > > Istituto di Economia Politica, Università Bocconi > > Via U. Gobbi, 5, 20136 Milano > > Italy > > tel. + 02 5836 5411 > > fax. + 02 5836 5438 > > * > > * For searches and help try: > > * http://www.stata.com/support/faqs/res/findit.html > > * http://www.stata.com/support/statalist/faq > > * http://www.ats.ucla.edu/stat/stata/ > > > > > * > * For searches and help try: > * http://www.stata.com/support/faqs/res/findit.html > * http://www.stata.com/support/statalist/faq > * http://www.ats.ucla.edu/stat/stata/ > -- Giovanni S.F. Bruno http://ideas.repec.org/e/pbr136.html Istituto di Economia Politica, Università Bocconi Via U. Gobbi, 5, 20136 Milano Italy tel. + 02 5836 5411 fax. + 02 5836 5438 * * For searches and help try: * http://www.stata.com/support/faqs/res/findit.html * http://www.stata.com/support/statalist/faq * http://www.ats.ucla.edu/stat/stata/

**References**:**Re: st: dynamic short panel***From:*"sistoand80" <sistoand80@libero.it>

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