Likelihood corrections for two-way models

Koen Jochmans and Taisuke Otsu

STICERD - Econometrics Paper Series from Suntory and Toyota International Centres for Economics and Related Disciplines, LSE

Abstract: The use of two-way fixed-effect models is widespread. The presence of incidental parameter bias, however, invalidates statistical inference based on the likelihood. In this paper we consider modifications to the (profile) likelihood that yield asymptotically unbiased estimators as well as likelihood-ratio and score tests with correct size. The modifications are widely applicable and easy to implement. Our examples illustrate that the modifications can lead to dramatic improvements relative to the maximum likelihood method both in terms of point estimation and inference.

Keywords: asymptotic bias; bias correction; fixed effects; information bias; modified profile likelihood; panel data; MCMC; penalization; rectangular-array asymptotics (search for similar items in EconPapers)
JEL-codes: C12 C14 (search for similar items in EconPapers)
Date: 2018-02
New Economics Papers: this item is included in nep-ecm and nep-ets
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https://sticerd.lse.ac.uk/dps/em/em598.pdf (application/pdf)

Related works:
Journal Article: Likelihood Corrections for Two-way Models (2019)
Working Paper: Likelihood corrections for two-way models (2019)
Working Paper: Likelihood Corrections for Two-way Models (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:cep:stiecm:598

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