Inference on time-invariant variables using panel data: A pretest estimator

Jean-Bernard Chatelain (1, 2) , Kirsten Ralf (3, 4)

1 PSE - Paris School of Economics
2 PJSE - Paris Jourdan Sciences Economiques
3 ESCE – International Business School
4 INSEEC - Institut des hautes études économiques et commerciales | School of Business and Economics

For static panel data models that include endogenous time-invariant variables correlated with individual effects, exogenous averages over time of time-varying variables can be internal instruments. To pretest their exogeneity, we first estimate a random effects model that includes all averages over time of time-varying variables (Mundlak, 1978; Krishnakumar, 2006). Internal instruments are then selected if their parameter is statistically different from zero (Mundlak, 1978; Hausman and Taylor, 1981). Finally, we estimate a Hausman-Taylor (1981) model using these internal instruments. We then evaluate the biases of currently used alternative estimators in a Monte-Carlo simulation: repeated between, ordinary least squares, two-stage restricted between, Oaxaca-Geisler estimator, fixed effect vector decomposition, and random effects (restricted generalized least squares).

Mots clés: Time-invariant variables; Panel data; Pretest estimator; Instrumental variables; Mundlak estimator; Hausman-Taylor estimator

Domaines: Economies et finances

Jean-Bernard Chatelain, Kirsten Ralf. Inference on time-invariant variables using panel data: A pretest estimator. Economic Modelling, 2021, 97, pp.157-166. ⟨10.1016/j.econmod.2021.01.014⟩. ⟨halshs-03672612⟩