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st: xtabond: fixed vs. random effects

From   "Jeremy T. Fox" <[email protected]>
To   [email protected]
Subject   st: xtabond: fixed vs. random effects
Date   Mon, 31 Mar 2003 22:16:41 -0800

The Stata 8 (and 7) command xtabond estimates the Arellano and Bond dynamic panel data model such as

y_it = a * y_{i,t-1} + b * x_it + nu_i + eps_it

In the Stata 8 Cross Sectional Time Series manual page 16, it says that the nu_i are random effects that are i.i.d. over the panels.

In the Arellano and Bond paper, page 280, they first derive the estimator for the fixed effects case, where nu_i can be correlated with x_it. After this, the authors describe how assuming nu_i is a random effect and not correlated with x_it allows for some additional moment restrictions with which to increase efficiency, which they then derive. The rather stylized discussion of the xtabond "Methods and Formulas" on page 28 and on in the manual does not mention that the estimator imposes the additional moment restrictions associated with random effects.

So does anyone know whether xtabond uses the easier fixed effects assumption, or whether it imposes the additional moment restrictions derived from the random effects assumption?

Thanks a lot, Jeremy

Jeremy T. Fox
[email protected]

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