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Re: st: Clustering Standard Errors versus Dummies


From   natasha agarwal <agarwana2@googlemail.com>
To   statalist@hsphsun2.harvard.edu
Subject   Re: st: Clustering Standard Errors versus Dummies
Date   Fri, 2 Jul 2010 10:59:04 +0100

On Thu, Jul 1, 2010 at 8:17 PM, Christopher Baum <kit.baum@bc.edu> wrote:
> <>
> Natasha asks:
>
> Can anyone please explain me the difference between clustering the
> standard errors and including dummies.
>
> So for example if am estimating an augmented production function on an
> unbalanced panel dataset where I observe firms over time and I include
> firm specific fixed effects. Can anyone please explain me the need
> then to cluster the standard errors at the firm level?
>
> Different assumptions are involved with dummies vs. clustering.
>
> Including dummies (firm-specific fixed effects) deals with unobserved heterogeneity at the firm level that if ignored
> would render your POINT estimates inconsistent. Assuming i.i.d. errors (as xtreg, fe does, as it is just OLS)
> may lead to significant bias in the INTERVAL estimates (that is, standard errors) if there are significant within-panel
> error correlations (that is, firm i's error is correlated over time with other errors of firm i).

Camerron et al., 2010 in their paper "Robust Inference with Clustered
Data" mentions that "in a state-year panel of individuals (with
dependent variable y(ist)) there may be clustering both within years
and within states. If the within-year clustering is due to shocks hat
are the same across all individuals in a given year, then including
year fixed effects as regressors will absorb within-year clustering
and inference need only clustering on the state".

Does this then imply that if I include year fixed effects, industry
fixed effects and estimate the same with within estimator then I do
not need to cluster on industry and year?



> I am working, with coauthors Mark Schaffer and Austin Nichols, on a presentation on clustering for the July BOS'10 Stata Conference. It will be available on the web after the conference.
>
> Kit
>
>
>
> Kit Baum   |   Boston College Economics & DIW Berlin   |   http://ideas.repec.org/e/pba1.html
>                              An Introduction to Stata Programming  |   http://www.stata-press.com/books/isp.html
>   An Introduction to Modern Econometrics Using Stata  |   http://www.stata-press.com/books/imeus.html
>
>
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