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# Re: st: a simple panel data question: FE and RE

 From Maarten buis To statalist@hsphsun2.harvard.edu Subject Re: st: a simple panel data question: FE and RE Date Fri, 1 Aug 2008 23:03:56 +0100 (BST)

```One way of thinking about fixed effects (in a linear model) is that a
dummy is added for each unit (minus one reference unit). These dummies
absorb all the observed and unobserved differences between the units,
so it does take the across variation into account. However, you can no
longer describe what a unit level variable, like the average value of
X, does to Y. In a random effects model you can describe the effects of
unit level variables, but at a price: you now have to make a number of
assumptions you did not have to make with a fixed effects model. The
assumption that people like least is the assumption that the random
effect is uncorrelated with the observed variables.

-- Maarten

--- yjh jsh <jshyjh1@gmail.com> wrote:

> Dear all,
> I have a newbie question here. sorry for this.
>
> I have a panel data with variable Y and X for two units for example.
> unit  year   X    Y
> 1     1991  1     20
> 1     1992  2    19
> 1     1993  3     21
> 2     1991 10    40
> 2     1992 11    40
> 2     1993 11    39
>
> That is, there is a larger cross variation than within variation
>
> As i understand, FE only address the variation within units. So, if I
> use FE, i will not find a significant relationship between x and y
> based on the nature of the hypothectical data.
> but this finding does not take into account the fact Y takes higher
> vaue in unit 2 because x takes higher value in that unit. That is, fe
> failed to represent the across-variation.
>
> Is my understanding correct?
>
> Sorry for this simple question.
>
> best
> *
> *   For searches and help try:
> *   http://www.stata.com/help.cgi?search
> *   http://www.stata.com/support/statalist/faq
> *   http://www.ats.ucla.edu/stat/stata/
>

-----------------------------------------
Maarten L. Buis
Department of Social Research Methodology
Vrije Universiteit Amsterdam
Boelelaan 1081
1081 HV Amsterdam
The Netherlands

visiting address:
Buitenveldertselaan 3 (Metropolitan), room Z434

+31 20 5986715

http://home.fsw.vu.nl/m.buis/
-----------------------------------------

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*
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*   http://www.ats.ucla.edu/stat/stata/
```

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