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

 From "Schaffer, Mark E" To Subject RE: st: fixed effects with clustering when the number of levels of variable to be absorbed exceeds number of clusters Date Wed, 1 Mar 2006 15:19:49 -0000

```Daniel,

What you need to be aware of is that the asymptotics justifying the
cluster-robust estimator requires the number of clusters to go off to
infinity.  I don't think Austin's comment is quite right, at least in
the context you've cited it.  The number of fixed effects can be much
bigger than the number of clusters, and that won't by itself cause a
problem - after all, the fixed effects are not actually being estimated.
What *will* cause problems is if you have very few clusters, esp. if
compared to the number of parameters that you *are* estimating.  In your
example, you want to cluster by state.  50 is not very far on the way to
infinity, but maybe it's enough for your purposes.  But if you also have
lots of parameters that you want to test, then you will start running
into serious problems (nb: the rank of the cluster-robust var-cov matrix
is equal to the number of clusters minus the number of estimated
parameters).

Hope this helps.

--Mark

> -----Original Message-----
> From: owner-statalist@hsphsun2.harvard.edu
> [mailto:owner-statalist@hsphsun2.harvard.edu] On Behalf Of
> Daniel Simon
> Sent: 01 March 2006 15:02
> To: statalist@hsphsun2.harvard.edu
> Subject: Re: st: fixed effects with clustering when the
> number of levels of variable to be absorbed exceeds number of clusters
>
> Sorry - I made a mistake in the subject line of my last
> message. It is now correct. Daniel
>
> At 09:59 AM 3/1/2006 -0500, you wrote:
> >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
> >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
> >>       -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
> >>
> >>*
> >>*   For searches and help try:
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> >
> >Daniel Simon
> >Assistant Professor
> >Department of Applied Economics and Management Cornell University
> >(607) 255-1626
> >*
> >*   For searches and help try:
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>
> Daniel Simon
> Assistant Professor
> Department of Applied Economics and Management Cornell University
> (607) 255-1626
>
> *
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>
>

*
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```