Re: st: Estimating firm level data on regional level data using a within estimator.

[Maarten buis <maartenbuis@yahoo.co.uk>]

--- On Sun, 6/6/10, natasha agarwal wrote:
> I estimate it with a within estimator, i.e. ur fixed
> effects. When I do so the minute I include all the time 
> dummies, FDI goes insig but thats my main variable of
> interest. The problem that I have found out is that FDI
> is behaving like a time dummy because all the firms
> within a region for each year will have the same value
> of FDI. 

The problem with macro quantities is that they are usually highly 
correlated with other macro quantities and time, so it is hard to
disentangle the effects. Moreover, there are only so many 
observations possible on the macro level. These two together means
that often you have very little statistical power to play with. 

The advantage of fixed effects regression is that it provides a
strong reason for believing that you controlled for some of the 
unobserved and possible confounding variables on the the region 
level. However, the price you have to pay is that you loose a lot 
of power; i.e. you loose all the information from the comparison 
between regions. Since you don't have a lot to begin with, that 
is very bad news.

Random effects don't allow you to controll for unobserved 
confounding variables on the region level (the random effects are
assumed to be uncorrelated with the observed variables), but it
does allow you to also use the information from the comparison
between regions.

Then you have rather pragmatic discipline specific reasons: e.g.
within economics they tend to be so obsessed with fixed effects
regression, that you will have a hard time getting a random 
effects model published.

Hope this helps,
Maarten

--------------------------
Maarten L. Buis
Institut fuer Soziologie
Universitaet Tuebingen
Wilhelmstrasse 36
72074 Tuebingen
Germany

http://www.maartenbuis.nl
--------------------------


      

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