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Time-invariant Regressors under Fixed Effects: Identification via a Proxy Variable

Matej Belin

CERGE-EI Working Papers from The Center for Economic Research and Graduate Education - Economics Institute, Prague

Abstract: Identification of a coefficient associated with a time-invariant regressor (TIR) often relies on the assumption that the TIR is uncorrelated with the unobserved heterogeneity across panel units. We derive an estimator which avoids the random-effects assumption by employing a proxy for the unobserved heterogeneity thus extending the existing results on proxy variables from the cross-sectional literature. In addition, we quantify the sensitivity of the estimates to potential violations of the random-effects assumption when no proxy is available. The utility of this approach is illustrated on the problem of implausibly high distance elasticity produced by gravity models of international trade.

Keywords: identification; model specification; omitted variable bias; panel data; variable addition (search for similar items in EconPapers)
JEL-codes: C01 C18 C33 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ecm
Date: 2018-09
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