Binarization for panel models with fixed effects

Irene Botosaru and Chris Muris

No 31/17, CeMMAP working papers from Institute for Fiscal Studies

Abstract: In nonlinear panel models with fixed effects and fixed-T, the incidental parameter problem poses identification difficulties for structural parameters and partial effects. Existing solutions are model-specific, likelihood-based, impose time homogeneity, or restrict the distribution of unobserved heterogeneity. We provide new identification results for the large class of Fixed Effects Linear Transformation (FELT) models with unknown, time-varying, weakly monotone transformation functions. Our results accommodate continuous and discrete outcomes and covariates, require only two time periods and no parametric distributional assumptions. First, we provide a systematic solution to the incidental parameter problem in FELT via binarization, which transforms FELT into many binary choice models. Second, we identify the distribution of counterfactual outcomes and a menu of time-varying partial effects. Third, we obtain new results for nonlinear difference-in-differences with discrete and censored outcomes, and for FELT with random coefficients. Finally, we propose rank- and likelihood-based estimators that achieve √n rate of convergence.

Date: 2017-06-20
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Citations: View citations in EconPapers (1)

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Working Paper: Binarization for panel models with fixed effects (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:azt:cemmap:31/17

DOI: 10.1920/wp.cem.2017.3117

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