Estimating Fixed Effects: Perfect Prediction and Bias in Binary Response Panel Models, with an Application to the Hospital Readmissions Reduction Program

Johannes Kunz, Kevin Staub and Rainer Winkelmann

No 11182, IZA Discussion Papers from Institute of Labor Economics (IZA)

Abstract: The maximum likelihood estimator for the regression coefficients, ?, in a panel binary response model with fixed effects can be severely biased if N is large and T is small, a consequence of the incidental parameters problem. This has led to the development of conditional maximum likelihood estimators and, more recently, to estimators that remove the O(T–1) bias in ?^. We add to this literature in two important ways. First, we focus on estimation of the fixed effects proper, as these have become increasingly important in applied work. Second, we build on a bias-reduction approach originally developed by Kosmidis and Firth (2009) for cross-section data, and show that in contrast to other proposals, the new estimator ensures finiteness of the fixed effects even in the absence of within-unit variation in the outcome. Results from a simulation study document favourable small sample properties. In an application to hospital data on patient readmission rates under the 2010 Affordable Care Act, we find that hospital fixed effects are strongly correlated across different treatment categories and on average higher for privately owned hospitals.

Keywords: perfect prediction; bias reduction; penalised likelihood; logit; probit; Affordable Care Act (search for similar items in EconPapers)
JEL-codes: C23 C25 I18 (search for similar items in EconPapers)
Pages: 46 pages
Date: 2017-11
New Economics Papers: this item is included in nep-ecm and nep-hea
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Downloads: (external link)
https://docs.iza.org/dp11182.pdf (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:iza:izadps:dp11182

Ordering information: This working paper can be ordered from
IZA, Margard Ody, P.O. Box 7240, D-53072 Bonn, Germany

Access Statistics for this paper

More papers in IZA Discussion Papers from Institute of Labor Economics (IZA) IZA, P.O. Box 7240, D-53072 Bonn, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Holger Hinte ().