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st: fixed effects with clustering when the number of clusters exceeds levels of variable to be absorbed


From   Daniel Simon <dhs29@cornell.edu>
To   statalist@hsphsun2.harvard.edu
Subject   st: fixed effects with clustering when the number of clusters exceeds levels of variable to be absorbed
Date   Wed, 01 Mar 2006 09:59:31 -0500

Hi Austin - thanks for pointing out that "the number of levels of the absorb() variable should not exceed the number of clusters." I have two questions about this: (1) I assume that the same holds true for xtreg,fe with clustering (given that this yields identical std errors to areg with clustering). Is this assumption correct? (2) Does anyone have suggestions for the most efficient way to estimate fixed-effects models with clustering when there are thousands of fixed effects but clustering occurs on a variable with many fewer units? For example, if I have a panel dataset tracking thousands of individuals over time and I want to examine the impact of a state policy variable, then I would want to estimate a model with individual fixed effects but I would also want to cluster by state.
What would be a sensible way to proceed in this situation?

Thanks. Daniel

At 02:06 PM 2/28/2006 -0500, you wrote:

Perhaps I should ignore this question in the same way you have ignored
the advice in the Statalist FAQ on how to write a well-formed question
(in particular, you give no indication what command you used or what
error message you got, much less show us the output), but you should
certainly read:
      -help xtreg- -help xtdata- and -help areg-
for starters.  Note also that you may want to cluster on id, assuming
your fixed effects are individual id and year effects, to allow for
arbitrary serial correlation within panel, and -cluster- implies
-robust-. But see the various FAQs on the subject, and such advice as
appears in the relevant help files, e.g.
  Note: Exercise caution when using the cluster() option with areg.
        The effective number of degrees of freedom for the robust variance
        estimator is (n_g - 1), where n_g is the number of clusters.  Thus
        the number of levels of the absorb() variable should not exceed the
        number of clusters.

On 2/28/06, Yasmine Kent <yasmine_kent@yahoo.co.uk> wrote:
> Hi,
>
> Apologies if this is a basic question...
>
> I would like to obtain ROBUST standard errors and
> t-statistics in a panel data regression that I am
> running (with 2-way fixed effects). The 'robust'
> command does not appear to work with panel data, it
> gives an error message. Theoretically, I thought that
> it should be possible to get these. Is there another
> command I should use instead? (I am using Stata 8).
>
> Thank you!
> Yasmine

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Daniel Simon
Assistant Professor
Department of Applied Economics and Management
Cornell University
(607) 255-1626
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