A simple and computationally trivial estimator for grouped fixed effects models

Martin Mugnier ()
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Martin Mugnier: PSE - Paris School of Economics - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement - ENPC - École nationale des ponts et chaussées - IP Paris - Institut Polytechnique de Paris, PJSE - Paris Jourdan Sciences Economiques - UP1 - Université Paris 1 Panthéon-Sorbonne - ENS-PSL - École normale supérieure - Paris - PSL - Université Paris Sciences et Lettres - EHESS - École des hautes études en sciences sociales - CNRS - Centre National de la Recherche Scientifique - INRAE - Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement - ENPC - École nationale des ponts et chaussées - IP Paris - Institut Polytechnique de Paris

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Abstract: This paper introduces a new fixed effects estimator for linear panel data models with clustered time patterns of unobserved heterogeneity. The method avoids non-convex and combinatorial optimization by combining a preliminary consistent estimator of the slope coefficient, an agglomerative pairwise-differencing clustering of cross-sectional units, and a pooled ordinary least squares regression. Asymptotic guarantees are established in a framework where T can grow at any power of N , as both N and T approach infinity. Unlike most existing approaches, the proposed estimator is computationally straightforward and does not require a known upper bound on the number of groups. As existing approaches, this method leads to a consistent estimation of well-separated groups and an estimator of common parameters asymptotically equivalent to the infeasible regression controlling for the true groups. An application revisits the statistical association between income and democracy.

Date: 2025-07
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Published in Journal of Econometrics, 2025, 250, ⟨10.1016/j.jeconom.2025.106011⟩

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Persistent link: https://EconPapers.repec.org/RePEc:hal:journl:halshs-05163274

DOI: 10.1016/j.jeconom.2025.106011

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