1 then this is just the fixed effects estimator if ?

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= 1, then this is just the fixed effects estimator If λ = 0, then this is just the OLS estimator So, the bigger the variance of the unobserved effect, the closer it is to FE The smaller the variance of the unobserved effect, the closer it is to OLS Stata will do Random Effects for us
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Fall 2008 under Econometrics Prof. Keunkwan Ryu 9 Fixed Effects or Random Effects? More usual to think need fixed effects, since think the problem is that something unobserved is correlated with the x ’s If truly need random effects, the only problem is the standard errors Can just adjust the standard errors for correlation within group
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Fall 2008 under Econometrics Prof. Keunkwan Ryu 10 3.Other Uses of Panel Methods It’s possible to think of models where there is an unobserved fixed effect, even if we do not have true panel data A common example is where we think there is an unobserved family effect Can difference siblings Can estimate family fixed effect model
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Fall 2008 under Econometrics Prof. Keunkwan Ryu 11 Additional Issues Many of the things we already know about both cross section and time series data can be applied with panel data Can test and correct for serial correlation in the errors Can test and correct for heteroskedasticity Can estimate standard errors robust to both
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