Linear fixed-effects estimation with non-repeated outcomes

Helmut Farbmacher and Harald Tauchmann

No 03/2021, FAU Discussion Papers in Economics from Friedrich-Alexander University Erlangen-Nuremberg, Institute for Economics

Abstract: This paper demonstrates that popular linear fixed-effects panel-data estimators are biased and inconsistent when applied in a discrete-time hazard setting - that is, one in which the outcome variable is a binary dummy indicating an absorbing state, even if the data-generating process is fully consistent with the linear discrete-time hazard model. In addition to conventional survival bias, these estimators suffer from another source of - frequently severe - bias that originates from the data transformation itself and, unlike survival bias, is present even in the absence of any unobserved heterogeneity. We suggest an alternative estimation strategy, which is instrumental variables estimation using first-differences of the exogenous variables as instruments for their levels. Monte Carlo simulations and an empirical application substantiate our theoretical results.

Keywords: linear probability model; individual fixed effects; discrete-time hazard; absorbing state; survival bias; instrumental variables estimation (search for similar items in EconPapers)
JEL-codes: C23 C25 C41 (search for similar items in EconPapers)
Date: 2021, Revised 2021
New Economics Papers: this item is included in nep-dcm and nep-ecm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (6)

Downloads: (external link)
https://www.econstor.eu/bitstream/10419/238191/1/03-2021-1.pdf (application/pdf)

Related works:
Journal Article: Linear fixed-effects estimation with nonrepeated outcomes (2023)
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:zbw:iwqwdp:032021

Access Statistics for this paper

More papers in FAU Discussion Papers in Economics from Friedrich-Alexander University Erlangen-Nuremberg, Institute for Economics Contact information at EDIRC.
Bibliographic data for series maintained by ZBW - Leibniz Information Centre for Economics ().