We investigate the consequences of using time-invariant individual effects in panel data models when the unobservables are in fact time-varying. Using data from the British Offending Crime and Justice panel, we estimate a dynamic factor model of the occurrence of a range of illicit activities as outcomes of young people's development processes.Â This structure is then used to demonstrate that relying on the assumption of time-invariant individual effects to deal with confounding factors in a conventional dynamic panel data model is likely to lead to spurious "gateway" effects linking cannabis use to subsequent hard drug use.
Ordering information: This working paper can be ordered from Publications Office, Institute for Social and Economic Research, University of Essex, Wivenhoe Park, Colchester, Essex CO4 3SQ UK https://www.iser.essex.ac.uk/publications/
More papers in ISER Working Paper Series from Institute for Social and Economic Research Address: Publications Office, Institute for Social and Economic Research, University of Essex, Wivenhoe Park, Colchester, Essex CO4 3SQ UK Contact information at EDIRC. Series data maintained by Paul Groves ().