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Re: st: AW: Robust vs Cluster errors using xtreg fe in Stata10


From   Stas Kolenikov <skolenik@gmail.com>
To   statalist@hsphsun2.harvard.edu
Subject   Re: st: AW: Robust vs Cluster errors using xtreg fe in Stata10
Date   Tue, 9 Jun 2009 11:33:48 -0500

On 6/9/09, Carolina Lennon <carolina.lennon@gmail.com> wrote:
>  Previously, I thought that sometimes it could be not advisable to
>  implement cluster errors but still to implement robust errors (then,
>  the utility of having the two options separately). For instances,
>  when  the number of observations was higher enough but either the
>  number of clusters was lower than 50 or the number of explanatory
>  variables exceeded the number of clusters. In any case, the response
>  might be in the article! then many thanks again!

That's cheating on degrees of freedom. With few clusters, the
-vce(cluster)- variance estimator will be unstable -- in any case, the
asymptotics of both point estimates and the standard errors is that
the number of clusters goes to infinity. You would get standard errors
that are anti-conservative, although I don't think I've seen any proof
(analytical or by simulation) that they are inconsistent. I am sure
you can find situations where they are though.

The qualitative explanation that I can offer is that -robust- assumes
the data are independent, but when we are in the panel data world, we
know we are not. The contributions to the statistical model come from
a panel as a whole -- this is the case with the likelihood with
-xtreg, mle- for instance, and this is the case with -vce(cluster)-.

-- 
Stas Kolenikov, also found at http://stas.kolenikov.name
Small print: I use this email account for mailing lists only.
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