Time-invariant regressors under fixed effects: Simple identification via a proxy variable

Matěj Bělín

Economics Letters, 2020, vol. 186, issue C

Abstract: Identification of a coefficient associated with a time-invariant regressor (TIR) often relies on the assumption that the TIR is uncorrelated with the unobserved heterogeneity across panel units. We derive an estimator which avoids the random-effects assumption by employing a proxy for the unobserved heterogeneity thus extending the existing results on proxy variables from the cross-sectional literature. This method is easy to implement using standard routines for linear regression. Monte Carlo evidence shows the proposed estimator performs well is small samples.

Keywords: Omitted variable bias; Panel data; Random effects (search for similar items in EconPapers)
JEL-codes: C1 C3 (search for similar items in EconPapers)
Date: 2020
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:186:y:2020:i:c:s0165176519304057

DOI: 10.1016/j.econlet.2019.108799

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