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Shrinkage estimation of panel data models with interactive effects

Haiqi Li, Xingyi Chen and Jufang Liang

Economics Letters, 2022, vol. 210, issue C

Abstract: This study proposes a shrinkage estimator for linear panel data models. Our estimator is a weighted average of the additive and interactive effects estimators where the weight is inversely proportional to the Hausman-type test statistic. We establish the asymptotic distribution of the shrinkage estimator and show that its asymptotic risk is strictly smaller than that of the interactive estimator. A Monte Carlo simulation shows that the shrinkage estimator has a substantially smaller finite sample error relative to other estimators.

Keywords: Additive effects; Fixed effects; Hausman test; Interactive effects; Shrinkage estimator (search for similar items in EconPapers)
JEL-codes: C13 C33 (search for similar items in EconPapers)
Date: 2022
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DOI: 10.1016/j.econlet.2021.110228

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