Second-order corrected likelihood for nonlinear models with fixed effects

Yutao Sun

No 541931, Working Papers of Department of Economics, Leuven from KU Leuven, Faculty of Economics and Business (FEB), Department of Economics, Leuven

Abstract: We introduce a second-order correction technique for nonlinear fixed-effect models exposed to the incidental parameter problem. This technique produces a bias-corrected log-likelihood function that possesses a bias only to the order (in expectation) of O (T-3) where T is the number of time periods. As a consequence, the maximizer of the corrected log-likelihood, the corrected estimator, is also only biased to the order of O(T-3). The technique applies to static nonlinear fixed-effect models in which N, the number of individuals, is allowed to grow rapidly and T is assumed to grow at a rate satisfying N/T5 converging to 0. The proposed technique is general in the sense that it does not depend on a specific functional form of the log-likelihood function.

Date: 2016-05
New Economics Papers: this item is included in nep-ecm
Note: paper number DPS 16.06
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Published in Department of Economics. Discussion paper series,, pages 1-37

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Persistent link: https://EconPapers.repec.org/RePEc:ete:ceswps:541931

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