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Random Effects

Prf. José Fajardo

FGV/EBAPE

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Feasible GLS

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Marriagepremium2.do

Interpreting the RE Output

Beatles.do

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FE or RE Models?

'0

'1

: ( , ) 0 ( )

: ( , ) 0 ( )i it

i it

H Cov u random effects

H Cov u fixed effects

=

≠

x

x

Estimator Random Effects

E(ui|Xi) = 0

Fixed Effects

E(ui|Xi) ≠0

GLS or RE-OLS

(Random Effects)

Consistent and

Efficient

Inconsistent

LSDV or FE-OLS

(Fixed Effects)

Consistent

Inefficient

Consistent

Possibly Efficient

FE or RE Models?

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FE or RE Models?

Bias vs Efficiency

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Marriage example

Marriagepremium2.do

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CR 1988 example

xtreg lwage `x1' `x2', fe

estimates store FE

predict ufe, u

regress ufe `x2', robust

* Random effects: Mundlak approach

xtreg lwage `x1' `x2', re

estimates store RE

predict ure, u

* model comparisons

estimates table FE RE, b se t stats(r2_o rho)

hausman FE RE

Exercicio2.do

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Country example

Other Diagnosis Tests

Testing for FE

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Testing for RE

Testing for Cross-sectional Dependence

Testing for Cross-sectional Dependence

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Testing for Heteroskedasticity

Testing for Serial Correlation

Testing for Unit Root

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Different Research Questions?