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st: Controlling for year in panel data

From   "Hoetker, Glenn" <[email protected]>
To   <[email protected]>
Subject   st: Controlling for year in panel data
Date   Wed, 27 Jul 2005 16:33:47 -0500

The is somewhat related to a recent discussion and is more of a
statistical question than a Stata question. Any assistance would be most

I have panel data from 1986-2003.  Logic and examining the data suggest
that the dependent variable increased monotonically over time. Because I
have some time-invariant variables, I am using random-effects (Hausman
test indicates this is okay). What are the relative merits of either:

a. Including a YEAR variable, which will range from 1985 to 2003 in
value, or

b. Including 7 dummies, one for each year (except the omitted year)

Possibly complicating the issue (or not), I have two dummy variables,
one of which is set to one for all observations after 1994 and the other
set to one after 1998.  I have 47 observations per year, so degrees of
freedom are not critical. 

I have found little guidance in my standard texts. Thank you for any
guidance &/or references. 


Glenn Hoetker
Assistant Professor of Strategy
College of Business
University of Illinois at Urbana-Champaign
[email protected]

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