Re: st: First-Differece with or without a constant?

[Maarten Buis <maartenlbuis@gmail.com>]

---On Mon, May 7, 2012 at 1:47 PM, Hawal Shamon wrote:
> I like to estimate a First-Difference-Model on the basis of two waves.
>
> Some literature (e.g. Wooldridge 2008) recommends to estimate First Differenceusing the constant as follows:

Such literature reference with only an author name and year are not
appreciated on this list. Remember that this is an interdisciplinary
list: references that are so "World Famous within your
(sub-(sub-))discipline" that an author/year reference suffices, are
likely completely unknown outside your micro-cosmos. This is clearly
explained in the Statalist FAQ which you were asked to read before
posting.

> [Delta]yit = [alpha]0 + [Delta]x1it + . + [Delta]x2it + [Delta]eit ,
>
> where [alpha]0 denotes the difference of the intercepts of y for both years which is nothing else than the change. A disadvantage occurs when any change in x ([Delta]xkit) does not vary between the units. E.g., having a panel dataset with employees over two subsequent years means that job experience is increasing for all of them over the two subsequent years by one year. In this case [Delta]x1it will be dropped due to collinearity.

This is not a problem, just a mistake by the analyst: It makes no
sense to add a "variable" that does not vary. The solution is not to
leave out the constant, but to leave out the offending
"non-varying-variable".

> What do you think? Which model is "in general" the better one and why?

In general all you need is to understand the argument you are making
when using a given model and effectively communicate that with your
audience. More specific advise like "always add a constant" tends to
degenerate into a "cookbook-style" of statistics that generally does
more harm than good, e.g.
<http://www.stata.com/statalist/archive/2010-12/msg00614.html>.

-- Maarten

--------------------------
Maarten L. Buis
Institut fuer Soziologie
Universitaet Tuebingen
Wilhelmstrasse 36
72074 Tuebingen
Germany


http://www.maartenbuis.nl
--------------------------

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