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RE: st: Stata 11 Random Effects--Std. Errors


From   DE SOUZA Eric <eric.desouza@coleurope.eu>
To   "'statalist@hsphsun2.harvard.edu'" <statalist@hsphsun2.harvard.edu>
Subject   RE: st: Stata 11 Random Effects--Std. Errors
Date   Wed, 19 Aug 2009 19:37:17 +0200

To add more detail:
Two of the assumptions underlying the random effects model are that:
1. the unobservable effects are not correlated with the explanatory variables
2. the residuals have the random effects structure
The second assumption is not required for consistency.
Wooldridge's argument is: then why impose it. "With fixed T and large N asymptotics, we lose nothing in using robust standard errors and test statistics even if [the random effects error structure] holds".

Eric 


Eric de Souza
College of Europe
Brugge (Bruges), Belgium
http://www.coleurope.eu

-----Original Message-----
From: owner-statalist@hsphsun2.harvard.edu [mailto:owner-statalist@hsphsun2.harvard.edu] On Behalf Of David M. Drukker
Sent: 19 August 2009 19:04
To: statalist@hsphsun2.harvard.edu
Subject: RE: st: Stata 11 Random Effects--Std. Errors

Continuing the thread about why -xtreg .., re vce(robust)- changed its meaning between Stata 10 and Stata 11, Mark E Schaffer <M.E.Schaffer@hw.ac.uk> asked for a citation.

Wooldridge (2002, section 10.4.2) recommends the new approach of having
-vce(robust)- mean -vce(cluster panelvar)-.

When we first offered the -vce(robust)- and -vce(cluster clustvar)- on -xtreg, re-, we wanted to offer users the flexibility to use either estimator.  We had Monte Carlo simulations showing that there are data generating processes for which -vce(robust)- performs quite well, so we allowed users to choose.

Since we first offered these options, the literature has focused on always using -vce(cluster panelvar)- to obtain a "robust" estimator for -xtreg, re-.  We made the change because the new method is what users now expect and it offers additional generality.

   David
   --ddrukker@stata.com

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