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RE: st: appropriateness of cluster option with xtreg, fe


From   "Jason Yackee" <jyackee@law.usc.edu>
To   <statalist@hsphsun2.harvard.edu>
Subject   RE: st: appropriateness of cluster option with xtreg, fe
Date   Sun, 24 Sep 2006 08:10:49 -0700

Johannes,

Thank you for this helpful reply.  More essentially, I am wondering
whether adding FE _and_ clustering is (harmfully) redundant, where you
are clustering and "fixing" on the same id variable.  So in your opinion
it is fine to FE (or to add unit dummy variables (e.g. "country")) _and_
to cluster on the same units (e.g. "country" again)?

I ask because I had been taught that clustering on your unit ID was a
"weak" first-try method of dealing with intra-unit correlations, and
that adding unit fixed effects (either via the -xtgls, fe- method or a
LSDV approach) was a more radical second-try method; if the first method
(clustering) works, then stick with that; but if it doesn't, then move
on to the "stronger" FE approach, which has more inherent drawbacks than
clustering (such as forcing you to drop time-invariant, unit-specific
variables of theoretical interest).

I haven't really noticed people using FE and also clustering on the same
group variable, and am worried that what I am doing is "overkill" that
is causing my SEs to be overinflated.  You seem to say "no worries", and
I am very willing to take your word.  But I am wondering if others might
agree?

-----Original Message-----
From: owner-statalist@hsphsun2.harvard.edu
[mailto:owner-statalist@hsphsun2.harvard.edu] On Behalf Of Johannes
Schmieder
Sent: Saturday, September 23, 2006 2:27 PM
To: statalist@hsphsun2.harvard.edu
Subject: Re: st: appropriateness of cluster option with xtreg, fe

My thoughts on this: without the clustering, Stata assumes that the
underlying statistical model has 100 * 25 = 2500 observations with
independent error terms. The clustering adjusts for correlations
between the error terms over time, so you have in effect less
independent observations and you should expect your standard errors to
go up. This is nearly always the case, the example on the faq you
mentioned is more the exception (you need a strong negative
correlation between your error terms and even then it is not
necessarily the case that the SE go down). If you have reasons to
believe that error terms are not independent in a subgroup of your
observations (such as for the different time periods for a specific
individual in a panel, or e.g. for observations that are spatially
close) you should always cluster your SE.

regards, johannes

On 9/23/06, Jason Yackee <jyackee@law.usc.edu> wrote:
> Dear all,
>
> I am trying to replicate someone else's findings.  I have unbalanced
> panel data (N (units) =100, t=25).  The original analysis uses -
xtreg,
> fe -.  (fixed effects gls).  I can successfully replicate the original
> results using -xtreg, fe -, and also when using the "robust" standard
> error option: - xtreg, fe ro -.  But when I add a "cluster(panel_id)"
> option the key finding in the original analysis falls into
> insignificance: -xtreg dv iv, fe ro cluster(panel_id).  Standard
errors
> are about double for most variables when using the cluster(panel_id)
> option compared to using just the -fe -ro options; coefficients are
the
> same, as I would expect.
>
> Is clustering, as a general matter, statistically appropriate to
perform
> with -xtreg, fe- (I assume it is because Stata allows it, and Stata is
> smart).  And assuming my assumption is correct, is there a good method
> for determining whether clustering is warranted/justified in my
> particular case?
>
> Thoughts appreciated.  I wouldn't worry about this is clustering
versus
> non-clustering didn't make a key result disappear.    Also, I am aware
> of Sribney's FAQ on clustering at
> http://www.stata.com/support/faqs/stat/cluster.html, but he doesn't
> quite address my question.
>
> Jason Webb Yackee, Ph.D. Candidate; J.D.
> Fellow, Gould School of Law
> University of Southern California
> jyackee@law.usc.edu
> Cell: 919-358-3040
>
>
> *
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>


-- 
Johannes F. Schmieder
Ph.D. Student
Department of Economics
Columbia University
email: jfs2106@columbia.edu
cell: (+1) 631 903 5646
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