Nickell Bias in Panel Data: Fixed Effects Quiz and Flashcards

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Questions and Answers

What is a common source of bias for the OLS estimate of β1 in the presence of unobserved family effects?

Serial correlation in the error terms

Heteroscedasticity in the data

Measurement error in the dependent variable

Omitted variable bias (correct)

How can we eliminate family effects when estimating β1 using within-twin-pair estimation?

Including an instrumental variable in the model

Applying a kernel density estimation

Adding a new control variable to the regression model

Differencing the log wages within each family (correct)

What does the 'Nickell-bias' refer to in fixed effects models with lagged dependent variables?

Bias that is negligible for small values of T

Bias that is always positive regardless of the value of ρ

Bias that affects the coefficient on the lagged dependent variable (correct)

Bias introduced due to heteroscedasticity in the lagged dependent variable

In panel data settings, what is meant by 'modeling persistence'?

Incorporating the influence of past behavior on current behavior Signup and view all the answers

How does the Nickell-bias change as the number of time periods (T) in a fixed effects model increases?

It diminishes and tends towards zero Signup and view all the answers

What is the main difference in bias between OLS and fixed effects models with lagged dependent variables?

OLS introduces downward bias while fixed effects models introduce upward bias Signup and view all the answers

What type of bias can be eliminated by including time effects in a panel data model?

Bias from omitted variables that change over time but are constant across observations Signup and view all the answers

In the context of panel data models, what is the purpose of including fixed effects?

To account for unobserved heterogeneity across observations Signup and view all the answers

In the model $Y_{it} = \lambda_t + \beta_1 X_{it} + u_{it}$, what does $\lambda_t$ represent?

The time-varying effect that is constant across observations Signup and view all the answers

Which of the following estimation methods can be used to account for fixed effects in a panel data model?

Both dummy variable regression and within-transformation Signup and view all the answers

In the context of panel data models, what is the purpose of including dynamic panel models?

To address issues of endogeneity due to the presence of a lagged dependent variable Signup and view all the answers

In a panel data model with fixed effects, which of the following assumptions is violated?

Strict exogeneity of the independent variables Signup and view all the answers

Which of the following is true about fixed effects (FE) or first differences estimation techniques?

They can only avoid omitted variable bias for time-invariant variables or variables with the same effect across units. Signup and view all the answers

Which of the following is an example of a variable that could potentially cause omitted variable bias in the context discussed in the text?

Income per capita Signup and view all the answers

In the context of panel data analysis, what is the purpose of including fixed effects or time effects in the regression model?

To address omitted variable bias caused by time-invariant variables or variables with the same effect across units. Signup and view all the answers

What is the alternative estimation approach mentioned in the text for panel data analysis?

Random effects Signup and view all the answers

If a variable changes at different rates across units in a panel data analysis, what is the recommended approach according to the text?

Include the variable in the regression along with fixed and time effects. Signup and view all the answers

Which of the following statements is true about dynamic panel models, according to the text?

Dynamic panel models are mentioned as a topic but not discussed in detail. Signup and view all the answers

Study Notes

Unobserved Family Effects

Unobserved family effects (αf) can bias the OLS estimate of β1.
The within-twin-pair estimator can be used to eliminate family effects by differencing within family.

Modeling Persistence

Persistence is an important feature in many panel settings, meaning that today's behavior is partly a function of previous periods.
To capture persistence, lagged-dependent variables can be introduced into models.
However, in a fixed effects model, the lagged-dependent variable is biased downwards (Nickell-bias) by approximately −(1 + ρ)/(T − 1), where ρ < 1 is the coefficient on the lagged dependent variable.

Time Effects

Fixed effects can eliminate biases deriving from omitted variables that do not change over time.
Panel data also allow for the elimination of biases deriving from variables that change over time but have the same value in all states.
Time effects can be eliminated by including time dummies or using a within-transformation.

Further Explanatory Variables

Fixed effects (or first differences) and time effects are not a panacea against omitted variable bias.
They can only avoid omitted variable bias where the omitted variables do not change over time or have the same effect on all units of observation within one period.
Including additional variables that change at different rates in different states (e.g., income per-capita, unemployment rate, local measures for traffic safety) can help address omitted variable bias.

Random Effects

An alternative to the fixed effect model is the random effect (RE) model.

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Description

Explore the concepts of time effects and fixed effects in panel data analysis. Learn how including time-effects can help eliminate biases from omitted variables that change over time, while fixed effects can eliminate biases from variables that do not change over time.

Panel Data: Time Effects and Fixed Effects