Likelihood corrections for two-way models

Koen Jochmans and Taisuke Otsu

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: The use of panel data models with two-way fixed effects is widespread. Incidental-parameter bias, however, invalidates inference based on the (profile) likelihood. We consider modifications to the likelihood that yield asymptotically-unbiased estimators as well as test statistics that are size correct under rectangular-array asymptotics. The modifications are widely applicable and easy to implement. Through several examples we illustrate that the modifications can lead to dramatic improvements relative to maximum likelihood, both in terms of point estimation and inference.

Keywords: fixed effects; information bias; modified profile likelihood; panel data; penalization; rectangular-array asymptotics (search for similar items in EconPapers)
JEL-codes: C33 (search for similar items in EconPapers)
Pages: 16 pages
Date: 2019-06-01
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Citations: View citations in EconPapers (2)

Published in Annals of Economics and Statistics, 1, June, 2019, 134(134), pp. 227-242. ISSN: 2115-4430

Downloads: (external link)
http://eprints.lse.ac.uk/102697/ Open access version. (application/pdf)

Related works:
Journal Article: Likelihood Corrections for Two-way Models (2019)
Working Paper: Likelihood Corrections for Two-way Models (2018)
Working Paper: Likelihood corrections for two-way models (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:102697

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