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st: RE: Multicollinearity in fixed effects regressions


From   "Schaffer, Mark E" <M.E.Schaffer@hw.ac.uk>
To   <statalist@hsphsun2.harvard.edu>
Subject   st: RE: Multicollinearity in fixed effects regressions
Date   Wed, 14 Jul 2010 11:22:57 +0100

Bin,

> -----Original Message-----
> From: owner-statalist@hsphsun2.harvard.edu 
> [mailto:owner-statalist@hsphsun2.harvard.edu] On Behalf Of Bin Dong
> Sent: 14 July 2010 08:41
> To: statalist@hsphsun2.harvard.edu
> Subject: st: Multicollinearity in fixed effects regressions
> 
> Dear all,
> 
> I have a maybe stupid question when I estiamte the FE model 
> by including individual dummies. Some of independent 
> variables in my fixed effects regressions are time-invariant 
> and therefore theoretically have perfect multicollinearity 
> with individual dummies.
> However, I always get significant coefficients of these 
> variables in my fixed effects regressions with different 
> controls.

The most likely explanation is that your variables are time-invariant and collinear with the FE dummies, but Stata is dropping some of the FE dummies rather than the time-invariant variables.

The easiest way to check if this is happening is to estimate the same equation using Stata's official -xtreg,fe- or -areg-.  Does Stata drop the time-invariant variables now?  Are the coefficients on the time-varying variables the same as in your original specification, when you included the FEs by hand?  If the answer to both questions is "yes", then this is what is happening.  And the coefficients on the time-invariants variables mean very little.

--Mark

> Are the results reliable because my sample size is 
> large (1600 obs) enough to provide adequate information?  If 
> anyone has an idea about my results, I would greatly 
> appreciate any assistance you could provide.Thanks in advance
> 
> Cheers,
> Bin
> 
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