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st: Re: fixed effects vs random effects


From   Kit Baum <baum@bc.edu>
To   statalist@hsphsun2.harvard.edu
Subject   st: Re: fixed effects vs random effects
Date   Fri, 2 Feb 2007 06:39:57 -0500

Not so. xtreg,fe is the least squares dummy variable model: OLS with unit-specific dummies. If OLS is inappropriate for that model due to endogeneity of one or more regressors, then taking care of the unobserved heterogeneity does not make it consistent. Use xtivreg or better yet xtivreg2 using an appropriate set of instruments. xtivreg2 has extensive diagnostics for the validity and strength of instruments. It does not, however, deal with random effects models. But if your xtreg,fe has endogeneity, there's no way that xtreg,re on the same model would be appropriate either, as it assumes that the unit-specific random terms are also independent of the idiosyncratic error.


Kit Baum, Boston College Economics
http://ideas.repec.org/e/pba1.html
An Introduction to Modern Econometrics Using Stata:
http://www.stata-press.com/books/imeus.html


On Feb 2, 2007, at 2:33 AM, Shams wrote:


In this regard, my understanding is that Fixed Effect
(FE) estimation (with xtreg, fe) would control for
both unobserved and endogeneity in the regressors and
consistent and efficient for large T and if there is
sufficient within panel variation. Alternatively,
random effect (RE) estimation (xtreg, re) would only
control for random unobserved heterogeneity but not
the endogeneity issue.
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