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Re: st: appropriateness of cluster option with xtreg, fe

From   "Austin Nichols" <[email protected]>
To   [email protected]
Subject   Re: st: appropriateness of cluster option with xtreg, fe
Date   Mon, 25 Sep 2006 10:37:45 -0400

Jason et al.--

I agree with Johannes that fixed effects and clustering address
related but separate concerns, and I think Mark Schaffer could
usefully weigh in on the smaller-sample properties of clustering and
fixed-effects estimation in an IV regression (it seems OK, in short,
and you can test "enough" even when a test of the overall model is
infeasible, because there are more coefficients than degrees of
freedom when the number of clusters is the same as the number of fixed

But the second paragraph of Johannes' email seems to imply you should
"always cluster your standard error on the same level on which you
would use fixed effects" which is not the case.  For example, if you
observed individuals (who didn't move) over time, and you regressed
their outcomes on county-level variables, you might want to include
fixed effects for individual people, but cluster on the county level
(accounting for the intra-county clustering of errors over time and

A useful treatment for the general case is
"Robust Standard Error Estimation in Fixed-Effects Panel Models,"
by Gábor Kézdi (sometimes Gabor Kezdi), originally published as a
working paper in about 2001, and usually cited that way, but now with
a publication date of 2004, and a ridiculously long URL:
but available here for a limited time:

Another frequently cited source is
Arellano (1987). "Computing robust standard errors for within-groups
estimators." Oxford Bulletin of Economics and Statistics. Vol. 49. No.
4. p. 431–434

On 9/24/06, Johannes Schmieder <[email protected]> wrote:
I would say that in applied microeconometricians it is very much
standard today to always cluster your standard error on the same level
on which you would use fixed effects. Of course if you use several
fixed effects (e.g. in an education framework you might have grade,
school and year fixed effects) you have to put some thinking into the
question on which level it is best to cluster. Generally it is not
only fine to use FE and cluster together, I would go as far as saying
that not doing it is a bit fishy. I think this trend in economics is
only a couple of years old when a paper by duflo, bertrand and
mullainathan pointed out the severity of this problem. Maybe in other
disciplines this is not (yet) standard.

best, Johannes
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