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4 Panel Data | A Guide on Data Analysis

12.4 Panel Data

Detail notes in R can be found here

Follows an individual over T time periods.

Panel data structure is like having n samples of time series data

Characteristics

Information both across individuals and over time (cross-sectional and time-series)

N individuals and T time periods

Data can be either

Balanced: all individuals are observed in all time periods

Unbalanced: all individuals are not observed in all time periods.
Assume correlation (clustering) over time for a given individual, with independence over
individuals.

Types

Short panel: many individuals and few time periods.

Long panel: many time periods and few individuals
Both: many time periods and many individuals

Time Trends and Time Effects

Nonlinear
Seasonality
Discontinuous shocks

Regressors

Time-invariant regressors xit = xi for all t (e.g., gender, race, education) have zero within
variation
Individual-invariant regressors xit = xt for all i (e.g., time trend, economy trends) have
zero between variation

Variation for the dependent variable and regressors

Overall variation: variation over time and individuals.

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Between variation: variation between individuals

Within variation: variation within individuals (over time).

Estimate Formula

Individual 1
x̄i = ∑ xit
mean T t

Overall 1
x̄ = ∑ ∑ xit
i t
mean NT

Overall 2 1 2
s = ∑ ∑ (xit − x̄)
i t
Variance O N T −1

Between 2 1 2
s = ∑ (x̄i − x̄)
variance B N −1 i

Within 2 1 2 1 2
s = ∑ ∑ (xit − x̄i ) = ∑ ∑ (xit − x̄i + x̄)
W i t i t
variance N T −1 N T −1

Note: s
2
O
≈ s
2
B
+ s
2
W

Since we have n observation for each time period t, we can control for each time effect
separately by including time dummies (time effects)

yit = xit β + d1 δ1 +. . . +dT −1 δT −1 + ϵit

Note: we cannot use these many time dummies in time series data because in time series
data, our n is 1. Hence, there is no variation, and sometimes not enough data compared to
variables to estimate coefficients.

Unobserved Effects Model Similar to group clustering, assume that there is a random effect
that captures differences across individuals but is constant in time.

yi t = xit β + d1 δ1 +. . . +dT −1 δT −1 + ci + uit

where

ci + uit = ϵit

ci unobserved individual heterogeneity (effect)

uit idiosyncratic shock
ϵit unobserved error term.

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12.4.1 Pooled OLS Estimator

If ci is uncorrelated with xit

′
E(x (ci + uit )) = 0
it

then A3a still holds. And we have Pooled OLS consistent.

If A4 does not hold, OLS is still consistent, but not efficient, and we need cluster robust SE.

Sufficient for A3a to hold, we need

Exogeneity for uit A3a (contemporaneous exogeneity): E(x

′
it
uit ) = 0 time varying error
Random Effect Assumption (time constant error): E(x
′
it
ci ) = 0

Pooled OLS will give you consistent coefficient estimates under A1, A2, A3a (for both uit and
RE assumption), and A5 (randomly sampling across i).

12.4.2 Individual-specific effects model

If we believe that there is unobserved heterogeneity across individual (e.g., unobserved

ability of an individual affects y), If the individual-specific effects are correlated with the
regressors, then we have the Fixed Effects Estimator. and if they are not correlated we
have the Random Effects Estimator.

12.4.2.1 Random Effects Estimator

Random Effects estimator is the Feasible GLS estimator that assumes uit is serially
uncorrelated and homoskedastic

Under A1, A2, A3a (for both uit and RE assumption) and A5 (randomly sampling across i),
RE estimator is consistent.

If A4 holds for uit , RE is the most efficient estimator

If A4 fails to hold (may be heteroskedasticity across i, and serial correlation over t),
then RE is not the most efficient, but still more efficient than pooled OLS.

12.4.2.2 Fixed Effects Estimator

also known as Within Estimator uses within variation (over time)

If the RE assumption is not hold (E(x′it ci ) ≠ 0 ), then A3a does not hold (E(x′it ϵi ) ≠ 0 ).

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Hence, the OLS and RE are inconsistent/biased (because of omitted variable bias)

However, FE can only fix bias due to time-invariant factors (both observables and
unobservables) correlated with treatment (not time-variant factors that correlated with the
treatment).

The traditional FE technique is flawed when lagged dependent variables are included in the
model. (Nickell 1981) (Narayanan and Nair 2013)

With measurement error in the independent, FE will exacerbate the errors-in-the-variables

bias.

12.4.2.2.1 Demean Approach

To deal with violation in ci , we have

yit = xit β + ci + uit

ȳi = x̄i β + ci + ūi

where the second equation is the time averaged equation

using within transformation, we have

yit − ȳi = (xit − x̄i )β + uit − ūi

because ci is time constant.

The Fixed Effects estimator uses POLS on the transformed equation

yit − ȳi = (xit − x̄i )β + d1 δ1 +. . . +dT −2 δT −2 + uit − ūi

we need A3 (strict exogeneity) (E((xit ′

− x̄i ) (uit − ūi ) = 0 ) to have FE consistent.

Variables that are time constant will be absorbed into ci . Hence we cannot make
inference on time constant independent variables.

If you are interested in the effects of time-invariant variables, you could consider the
OLS or between estimator
It’s recommended that you should still use cluster robust standard errors.

12.4.2.2.2 Dummy Approach

Equivalent to the within transformation (i.e., mathematically equivalent to Demean Approach),

we can have the fixed effect estimator be the same with the dummy regression

yit = xit β + d1 δ1 +. . . +dT −2 δT −2 + c1 γ1 +. . . +cn−1 γn−1 + uit

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where

1 if observation is i
ci = {
0 otherwise

The standard error is incorrectly calculated.

the FE within transformation is controlling for any difference across individual which is
allowed to correlated with observables.

12.4.2.2.3 First-difference Approach

Economists typically use this approach

yit − yi(t−1) = (xit − xi(t−1) )β + +(uit − ui(t−1) )

12.4.2.2.4 Fixed Effects Summary

The three approaches are almost equivalent.

Demean Approach is mathematically equivalent to Dummy Approach

If you have only 1 period, all 3 are the same.

Since fixed effect is a within estimator, only status changes can contribute to β variation.

Hence, with a small number of changes then the standard error for β will explode
Status changes mean subjects change from (1) control to treatment group or (2)
treatment to control group. Those who have status change, we call them switchers.
(more on this in

Treatment effect is typically non-directional.

You can give a parameter for the direction if needed.

Issues:

You could have fundamental difference between switchers and non-switchers. Even
though we can’t definitive test this, but providing descriptive statistics on switchers
and non-switchers can give us confidence in our conclusion.

Because fixed effects focus on bias reduction, you might have larger variance
(typically, with fixed effects you will have less df)

If the true model is random effect, economists typically don’t care, especially when ci is
the random effect and ci ⊥ xit (because RE assumption is that it is unrelated to xit ). The
reason why economists don’t care is because RE wouldn’t correct bias, it only improves

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efficiency over OLS.

You can estimate FE for different units (not just individuals).

FE removes bias from time invariant factors but not without costs because it uses within
variation, which imposes strict exogeneity assumption on uit :
E[(xit − x̄i )(uit − ūit )] = 0

Recall

Yit = β0 + Xit β1 + αi + uit

where ϵit = αi + uit

SSROLS
2
σ
^ϵ =
NT − K

SSRF E SSRF E
2
σ
^u = =
N T − (N + K) N (T − 1) − K

It’s ambiguous whether your variance of error changes up or down because SSR can increase
while the denominator decreases.

FE can be unbiased, but not consistent (i.e., not converging to the true effect)

12.4.2.2.5 FE Examples

12.4.2.2.6 Blau (1999)

Intergenerational mobility

If we transfer resources to low income family, can we generate upward mobility (increase
ability)?

Mechanisms for intergenerational mobility

1. Genetic (policy can’t affect) (i.e., ability endowment)

2. Environmental indirect
3. Environmental direct

%ΔHuman capital

%Δincome

4. Financial transfer

Income measures:

1. Total household income

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2. Wage income
3. Non-wage income
4. Annual versus permanent income

Core control variables:

Bad controls are those jointly determined with dependent variable

Control by mother = choice by mother

Uncontrolled by mothers:

mother race

location of birth

education of parents

household structure at age 14

Yijt = Xjt βi + Ijt αi + ϵijt

where

i = test

j = individual (child)

t = time

Grandmother’s model

Since child is nested within mother and mother nested within grandmother, the fixed effect of
child is included in the fixed effect of mother, which is included in the fixed-effect of
grandmother

Yijgmt = Xit βi + Ijt αi + γg + uijgmt

where

i = test, j = kid, m = mother, g = grandmother

where γg includes γm includes γj

Grandma fixed-effect

Pros:

control for some genetics + fixed characteristics of how mother are raised

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can estimate effect of parameter income

Con:

Might not be a sufficient control

Common to cluster a the fixed-effect level (common correlated component)

Fixed effect exaggerates attenuation bias

Error rate on survey can help you fix this (plug in the number only , but not the uncertainty
associated with that number).

12.4.2.2.7 BABCOCK (2010)

Tijct = α0 + Sjct α1 + Xijct α2 + uijct

where

Sjct is the average class expectation

Xijct α2 is the individual characteristics

i student

j instructor

c course

t time

Tijct = β0 + Sjct β1 + Xijct β2 + μjc + ϵijct

where μjc is instructor by course fixed effect (unique id), which is different from (θj + δc )

1. Decrease course shopping because conditioned on available information (μjc ) (class

grade and instructor’s info).
2. Grade expectation change even though class materials stay the same

Identification strategy is

Under (fixed) time-varying factor that could bias my coefficient (simultaneity)

Yijt = Xit β1 + Teacher Experience β2 + Teacher educationjt β3 + Teacher scoreit β4 + ⋯

jt

Drop teacher characteristics, and include teacher dummy effect

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Yijt = Xit α + Γit θj + uijt

where α is the within teacher (conditional on teacher fixed effect) and j = 1 → (J − 1)

Nuisance in the sense that we don’t about the interpretation of α

The least we can say about θj is the teacher effect conditional on student test score.

Yijt = Xit γ + ϵijt

γ is between within (unconditional) and eijt is the prediction error

~
eijt = Tit δj + e ijt

where δj is the mean for each group

Yijkt = Yijkt−1 + Xit β + Tit τj + (Wi + Pk + ϵijkt )

where

Yijkt−1 = lag control

τj = teacher fixed time

Wi is the student fixed effect

Pk is the school fixed effect

uijkt = Wi + Pk + ϵijkt

And we worry about selection on class and school

Bias in τ (for 1 teacher) is

N
1
∑(Wi + Pk + ϵijkt )
Nj
i=1

where Nj = the number of student in class with teacher j

1 Nj
then we can Pk +
Nj
∑
i=1
(Wi + ϵijkt )

Shocks from small class can bias τ

Nj
1
∑ ϵijkt ≠ 0
Nj
i=1

which will inflate the teacher fixed effect

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Even if we create random teacher fixed effect and put it in the model, it still contains bias
mentioned above which can still τ (but we do not know the way it will affect - whether more
positive or negative).

If teachers switch schools, then we can estimate both teacher and school fixed effect
(mobility web thin vs. thick)

Mobility web refers to the web of switchers (i.e., from one status to another).

Yijkt = Yijk(t−1) α + Xit β + Tit τ + Pk + ϵijkt

If we demean (fixed-effect), τ (teacher fixed effect) will go away

If you want to examine teacher fixed effect, we have to include teacher fixed effect

Control for school, the article argues that there is no selection bias

1 Nj
For Nj
∑
i=1
ϵijkt (teacher-level average residuals), var(τ ) does not change with Nj (Figure
2 in the paper). In words, the quality of teachers is not a function of the number of students

If var(τ ) = 0 it means that teacher quality does not matter

Spin-off of Measurement Error: Sampling error or estimation error

τ
^j = τ j + λ j

var(τ
^) = var(τ + λ)

Assume cov(τj , λj ) = 0 (reasonable) In words, your randomness in getting children does not
correlation with teacher quality.

Hence,

var(τ
^) = var(τ ) + var(λ)

var(τ ) = var(τ
^) − var(λ)

We have var(τ
^) and we need to estimate var(λ)

J
1 2
var(λ) = ∑σ
^j
J
j=1

where is the squared standard error of the teacher (a function of )

2
σ
^j j n

Hence,

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var(τ )
= reliability = true variance signal
var(τ
^)

also known as how much noise in τ

^ and

var(τ )
1 − = noise
var(τ
^)

Even in cases where the true relationship is that τ is a function of Nj , then our recovery
method for λ is still not affected

To examine our assumption

τ
^j = β0 + X j β1 + ϵ j

Regressing teacher fixed-effect on teacher characteristics should give us R

2
close to 0,
because teacher characteristics cannot predict sampling error (τ^ contain sampling error)

12.4.3 Tests for Assumptions

We typically don’t test heteroskedasticity because we will use robust covariance matrix
estimation anyway.

Dataset

library("plm")
data("EmplUK", package="plm")
data("Produc", package="plm")
data("Grunfeld", package="plm")
data("Wages", package="plm")

12.4.3.1 Poolability

also known as an F test of stability (or Chow test) for the coefficients

H0 : All individuals have the same coefficients (i.e., equal coefficients for all individuals).

Ha Different individuals have different coefficients.

Notes:

Under a within (i.e., fixed) model, different intercepts for each individual are assumed
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Under random model, same intercept is assumed

library(plm)

plm::pooltest(inv~value+capital, data=Grunfeld, model="within")

#>
#> F statistic
#>
#> data: inv ~ value + capital

#> F = 5.7805, df1 = 18, df2 = 170, p-value = 1.219e-10

#> alternative hypothesis: unstability

Hence, we reject the null hypothesis that coefficients are stable. Then, we should use the
random model.

12.4.3.2 Individual and time effects

use the Lagrange multiplier test to test the presence of individual or time or both (i.e.,
individual and time).

Types:

honda : (Honda 1985) Default

bp : (T. S. Breusch and Pagan 1980) for unbalanced panels
kw : (M. L. King and Wu 1997) unbalanced panels, and two-way effects
ghm : (Gourieroux, Holly, and Monfort 1982): two-way effects

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pFtest(inv~value+capital, data=Grunfeld, effect="twoways")

#>
#> F test for twoways effects
#>
#> data: inv ~ value + capital

#> F = 17.403, df1 = 28, df2 = 169, p-value < 2.2e-16

#> alternative hypothesis: significant effects
pFtest(inv~value+capital, data=Grunfeld, effect="individual")
#>
#> F test for individual effects
#>

#> data: inv ~ value + capital

#> F = 49.177, df1 = 9, df2 = 188, p-value < 2.2e-16
#> alternative hypothesis: significant effects
pFtest(inv~value+capital, data=Grunfeld, effect="time")
#>

#> F test for time effects

#>
#> data: inv ~ value + capital
#> F = 0.23451, df1 = 19, df2 = 178, p-value = 0.9997
#> alternative hypothesis: significant effects

12.4.3.3 Cross-sectional dependence/contemporaneous correlation

Null hypothesis: residuals across entities are not correlated.

12.4.3.3.1 Global cross-sectional dependence

pcdtest(inv~value+capital, data=Grunfeld, model="within")

#>
#> Pesaran CD test for cross-sectional dependence in panels
#>
#> data: inv ~ value + capital

#> z = 4.6612, p-value = 3.144e-06

#> alternative hypothesis: cross-sectional dependence

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12.4.3.3.2 Local cross-sectional dependence

use the same command, but supply matrix w to the argument.

pcdtest(inv~value+capital, data=Grunfeld, model="within")

#>

#> Pesaran CD test for cross-sectional dependence in panels

#>
#> data: inv ~ value + capital
#> z = 4.6612, p-value = 3.144e-06
#> alternative hypothesis: cross-sectional dependence

12.4.3.4 Serial Correlation

Null hypothesis: there is no serial correlation

usually seen in macro panels with long time series (large N and T), not seen in micro
panels (small T and large N)

Serial correlation can arise from individual effects(i.e., time-invariant error component), or
idiosyncratic error terms (e..g, in the case of AR(1) process). But typically, when we refer
to serial correlation, we refer to the second one.

Can be

marginal test: only 1 of the two above dependence (but can be biased towards
rejection)

joint test: both dependencies (but don’t know which one is causing the problem)

conditional test: assume you correctly specify one dependence structure, test
whether the other departure is present.

12.4.3.4.1 Unobserved effect test

semi-parametric test (the test statistic W ∼N

˙ regardless of the distribution of the errors)
with 2
H 0 : σμ = 0 (i.e., no unobserved effects in the residuals), favors pooled OLS.

Under the null, covariance matrix of the residuals = its diagonal (off-diagonal = 0)
It is robust against both unobserved effects that are constant within every group, and
any kind of serial correlation.

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pwtest(log(gsp)~log(pcap)+log(pc)+log(emp)+unemp, data=Produc)
#>
#> Wooldridge's test for unobserved individual effects
#>
#> data: formula

#> z = 3.9383, p-value = 8.207e-05

#> alternative hypothesis: unobserved effect

Here, we reject the null hypothesis that the no unobserved effects in the residuals. Hence, we
will exclude using pooled OLS.

12.4.3.4.2 Locally robust tests for random effects and serial correlation

A joint LM test for random effects and serial correlation assuming normality and
homoskedasticity of the idiosyncratic errors [Baltagi and Li (1991)](Baltagi and Li 1995)

pbsytest(log(gsp)~log(pcap)+log(pc)+log(emp)+unemp, data=Produc, test="j")

#>
#> Baltagi and Li AR-RE joint test - balanced panel
#>

#> data: formula

#> chisq = 4187.6, df = 2, p-value < 2.2e-16
#> alternative hypothesis: AR(1) errors or random effects

Here, we reject the null hypothesis that there is no presence of serial correlation, and
random effects. But we still do not know whether it is because of serial correlation, of random
effects or of both

To know the departure from the null assumption, we can use (Bera, Sosa-Escudero, and Yoon
2001)’s test for first-order serial correlation or random effects (both under normality and
homoskedasticity assumption of the error).

BSY for serial correlation

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pbsytest(log(gsp)~log(pcap)+log(pc)+log(emp)+unemp, data=Produc)
#>
#> Bera, Sosa-Escudero and Yoon locally robust test - balanced panel
#>
#> data: formula

#> chisq = 52.636, df = 1, p-value = 4.015e-13

#> alternative hypothesis: AR(1) errors sub random effects

BSY for random effects

pbsytest(log(gsp)~log(pcap)+log(pc)+log(emp)+unemp, data=Produc, test="re")

#>

#> Bera, Sosa-Escudero and Yoon locally robust test (one-sided) -

#> balanced panel
#>
#> data: formula
#> z = 57.914, p-value < 2.2e-16

#> alternative hypothesis: random effects sub AR(1) errors

Since BSY is only locally robust, if you “know” there is no serial correlation, then this test is
based on LM test is more superior:

plmtest(inv ~ value + capital, data = Grunfeld, type = "honda")

#>
#> Lagrange Multiplier Test - (Honda) for balanced panels
#>
#> data: inv ~ value + capital
#> normal = 28.252, p-value < 2.2e-16
#> alternative hypothesis: significant effects

On the other hand, if you know there is no random effects, to test for serial correlation, use
(BREUSCH 1978)-(Godfrey 1978)’s test

lmtest::bgtest()

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If you “know” there are random effects, use (Baltagi and Li 1995)’s. to test for serial correlation
in both AR(1) and MA(1) processes.

H0 : Uncorrelated errors.

Note:

one-sided only has power against positive serial correlation.

applicable to only balanced panels.

pbltest(log(gsp)~log(pcap)+log(pc)+log(emp)+unemp,
data=Produc, alternative="onesided")
#>

#> Baltagi and Li one-sided LM test

#>
#> data: log(gsp) ~ log(pcap) + log(pc) + log(emp) + unemp
#> z = 21.69, p-value < 2.2e-16
#> alternative hypothesis: AR(1)/MA(1) errors in RE panel model

General serial correlation tests

applicable to random effects model, OLS, and FE (with large T, also known as long
panel).
can also test higher-order serial correlation

plm::pbgtest(plm::plm(inv~value+capital, data = Grunfeld, model = "within"), order = 2)

#>
#> Breusch-Godfrey/Wooldridge test for serial correlation in panel models

#>
#> data: inv ~ value + capital
#> chisq = 42.587, df = 2, p-value = 5.655e-10
#> alternative hypothesis: serial correlation in idiosyncratic errors

in the case of short panels (small T and large n), we can use

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pwartest(log(emp) ~ log(wage) + log(capital), data=EmplUK)

#>
#> Wooldridge's test for serial correlation in FE panels
#>
#> data: plm.model

#> F = 312.3, df1 = 1, df2 = 889, p-value < 2.2e-16

#> alternative hypothesis: serial correlation

12.4.3.5 Unit roots/stationarity

Dickey-Fuller test for stochastic trends.

Null hypothesis: the series is non-stationary (unit root)
You would want your test to be less than the critical value (p<.5) so that there is evidence
there is not unit roots.

12.4.3.6 Heteroskedasticity

Breusch-Pagan test

Null hypothesis: the data is homoskedastic

If there is evidence for heteroskedasticity, robust covariance matrix is advised.

To control for heteroskedasticity: Robust covariance matrix estimation (Sandwich

estimator)

“white1” - for general heteroskedasticity but no serial correlation (check serial

correlation first). Recommended for random effects.
“white2” - is “white1” restricted to a common variance within groups. Recommended
for random effects.
“arellano” - both heteroskedasticity and serial correlation. Recommended for fixed
effects

12.4.4 Model Selection

12.4.4.1 POLS vs. RE

The continuum between RE (used FGLS which more assumption ) and POLS check back on
the section of FGLS

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Breusch-Pagan LM test

Test for the random effect model based on the OLS residual
Null hypothesis: variances across entities is zero. In another word, no panel effect.
If the test is significant, RE is preferable compared to POLS

12.4.4.2 FE vs. RE

RE does not require strict exogeneity for consistency (feedback effect between residual
and covariates)

Hypothesis If true

H0 : Cov(ci , xit ) = 0 ^
β
RE
is consistent and efficient, while ^
β
FE
is consistent

H0 : Cov(ci , xit ) ≠ 0 ^
β
RE
is inconsistent, while ^
β
FE
is consistent

Hausman Test

For the Hausman test to run, you need to assume that

strict exogeneity hold

A4 to hold for uit

Then,

Hausman test statistic: ^

H = (β RE
^
− β FE
′ ^
) (V (β RE
^
) − V (β FE
^
))(β RE
^
− β FE
) ∼ χ
2

n(X)

where n(X) is the number of parameters for the time-varying regressors.

A low p-value means that we would reject the null hypothesis and prefer FE
A high p-value means that we would not reject the null hypothesis and consider RE
estimator.

gw <- plm(inv~value+capital, data=Grunfeld, model="within")

gr <- plm(inv~value+capital, data=Grunfeld, model="random")

phtest(gw, gr)
#>
#> Hausman Test
#>

#> data: inv ~ value + capital

#> chisq = 2.3304, df = 2, p-value = 0.3119
#> alternative hypothesis: one model is inconsistent

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Generalized
Violation Instrumental Variable General Means
Basic Method of
variable Coefficients FGLS groups
Estimator Moments
Estimator Estimator estimator estimator estimato
estimator

12.4.5 Summary

All three estimators (POLS, RE, FE) require A1, A2, A5 (for individuals) to be consistent.
Additionally,

POLS is consistent under A3a(for uit ): E(x

′
it
uit ) = 0 , and RE Assumption E(x
′
it
ci ) = 0

If A4 does not hold, use cluster robust SE but POLS is not efficient
RE is consistent under A3a(for uit ): E(x
′
it
uit ) = 0 , and RE Assumption E(x
′
it
ci ) = 0

If A4 (for uit ) holds then usual SE are valid and RE is most efficient
If A4 (for uit ) does not hold, use cluster robust SE ,and RE is no longer most efficient
(but still more efficient than POLS)
FE is consistent under A3 ′
E((xit − x̄it ) (uit − ūit )) = 0

Cannot estimate effects of time constant variables

A4 generally does not hold for uit − ūit so cluster robust SE are needed

Note: A5 for individual (not for time dimension) implies that you have A5a for the entire data
set.

Estimator / True Model POLS RE FE

POLS Consistent Consistent Inconsistent

FE Consistent Consistent Consistent

RE Consistent Consistent Inconsistent

Based on table provided by Ani Katchova

12.4.6 Application

12.4.6.1 plm package

Recommended application of plm can be found here and here by Yves Croissant

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#install.packages("plm")
library("plm")

library(foreign)
Panel <- read.dta("http://dss.princeton.edu/training/Panel101.dta")

attach(Panel)
Y <- cbind(y)
X <- cbind(x1, x2, x3)

# Set data as panel data

pdata <- pdata.frame(Panel, index=c("country","year"))

# Pooled OLS estimator

pooling <- plm(Y ~ X, data=pdata, model= "pooling")
summary(pooling)

# Between estimator
between <- plm(Y ~ X, data=pdata, model= "between")
summary(between)

# First differences estimator

firstdiff <- plm(Y ~ X, data=pdata, model= "fd")
summary(firstdiff)

# Fixed effects or within estimator

fixed <- plm(Y ~ X, data=pdata, model= "within")

summary(fixed)

# Random effects estimator

random <- plm(Y ~ X, data=pdata, model= "random")
summary(random)

# LM test for random effects versus OLS

# Accept Null, then OLS, Reject Null then RE
plmtest(pooling,effect = "individual", type = c("bp")) # other type: "honda", "kw"," "gh

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# B-P/LM and Pesaran CD (cross-sectional dependence) test

pcdtest(fixed, test = c("lm")) # Breusch and Pagan's original LM statistic

pcdtest(fixed, test = c("cd")) # Pesaran's CD statistic

# Serial Correlation
pbgtest(fixed)

# stationary
library("tseries")
adf.test(pdata$y, k = 2)

# LM test for fixed effects versus OLS

pFtest(fixed, pooling)

# Hausman test for fixed versus random effects model

phtest(random, fixed)

# Breusch-Pagan heteroskedasticity

library(lmtest)
bptest(y ~ x1 + factor(country), data = pdata)

# If there is presence of heteroskedasticity

## For RE model

coeftest(random) #orginal coef

coeftest(random, vcovHC) # Heteroskedasticity consistent coefficients

t(sapply(c("HC0", "HC1", "HC2", "HC3", "HC4"), function(x) sqrt(diag(vcovHC(random, type

# HC0 - heteroskedasticity consistent. The default.
# HC1,HC2, HC3 – Recommended for small samples. HC3 gives less weight to influential obs

# HC4 - small samples with influential observations

# HAC - heteroskedasticity and autocorrelation consistent

## For FE model
coeftest(fixed) # Original coefficients

coeftest(fixed, vcovHC) # Heteroskedasticity consistent coefficients

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coeftest(fixed, vcovHC(fixed, method = "arellano")) # Heteroskedasticity consistent coef

t(sapply(c("HC0", "HC1", "HC2", "HC3", "HC4"), function(x) sqrt(diag(vcovHC(fixed, type

Advanced

Other methods to estimate the random model:

"swar" : default (Swamy and Arora 1972)

"walhus" : (Wallace and Hussain 1969)
"amemiya" : (Fuller and Battese 1974)
"nerlove" ” (Nerlove 1971)

Other effects:

Individual effects: default

Time effects: "time"
Individual and time effects: "twoways"

Note: no random two-ways effect model for random.method = "nerlove"

amemiya <- plm(Y ~ X, data=pdata, model= "random",random.method = "amemiya",effect = "tw

To call the estimation of the variance of the error components

ercomp(Y~X, data=pdata, method = "amemiya", effect = "twoways")

Check for the unbalancedness. Closer to 1 indicates balanced data (Ahrens and Pincus 1981)

punbalancedness(random)

Instrumental variable

"bvk" : default (Balestra and Varadharajan-Krishnakumar 1987)

"baltagi" : (Baltagi 1981)
"am" (Amemiya and MaCurdy 1986)
"bms" : (Trevor S. Breusch, Mizon, and Schmidt 1989)

instr <- plm(Y ~ X | X_ins, data = pdata, random.method = "ht", model = "random", inst.m

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12.4.6.1.1 Other Estimators

12.4.6.1.1.1 Variable Coefficients Model

fixed_pvcm <- pvcm(Y~X, data=pdata, model="within")

random_pvcm <- pvcm(Y~X, data=pdata, model="random")

More details can be found here

12.4.6.1.1.2 Generalized Method of Moments Estimator

Typically use in dynamic models. Example is from plm package

z2 <- pgmm(log(emp) ~ lag(log(emp), 1)+ lag(log(wage), 0:1) +

lag(log(capital), 0:1) | lag(log(emp), 2:99) +
lag(log(wage), 2:99) + lag(log(capital), 2:99),

data = EmplUK, effect = "twoways", model = "onestep",

transformation = "ld")
summary(z2, robust = TRUE)

12.4.6.1.1.3 General Feasible Generalized Least Squares Models

Assume there is no cross-sectional correlation Robust against intragroup heteroskedasticity

and serial correlation. Suited when n is much larger than T (long panel) However, inefficient
under groupwise heteorskedasticity.

# Random Effects
zz <- pggls(log(emp)~log(wage)+log(capital), data=EmplUK, model="pooling")

# Fixed
zz <- pggls(log(emp)~log(wage)+log(capital), data=EmplUK, model="within")

12.4.6.2 fixest package

Available functions

feols : linear models

feglm : generalized linear models

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femlm : maximum likelihood estimation

feNmlm : non-linear in RHS parameters

fepois : Poisson fixed-effect

fenegbin : negative binomial fixed-effect

Notes

can only work for fixest object

Examples by the package’s authors

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library(fixest)
data(airquality)

# Setting a dictionary
setFixest_dict(

c(
Ozone = "Ozone (ppb)",
Solar.R = "Solar Radiation (Langleys)",
Wind = "Wind Speed (mph)",
Temp = "Temperature"
)

# On multiple estimations: see the dedicated vignette

est = feols(Ozone ~ Solar.R + sw0(Wind + Temp) | csw(Month, Day),
data = airquality,

cluster = ~ Day)

etable(est)
#> model 1 model 2
#> Dependent Var.: Ozone (ppb) Ozone (ppb)

#>
#> Solar Radiation (Langleys) 0.1148*** (0.0234) 0.0522* (0.0202)
#> Wind Speed (mph) -3.109*** (0.7986)
#> Temperature 1.875*** (0.3671)
#> Fixed-Effects: ------------------ ------------------
#> Month Yes Yes

#> Day No No
#> __________________________ __________________ __________________
#> S.E.: Clustered by: Day by: Day
#> Observations 111 111
#> R2 0.31974 0.63686

#> Within R2 0.12245 0.53154

#>
#> model 3 model 4
#> Dependent Var.: Ozone (ppb) Ozone (ppb)
#>

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#> Solar Radiation (Langleys) 0.1078** (0.0329) 0.0509* (0.0236)

#> Wind Speed (mph) -3.289*** (0.7777)
#> Temperature 2.052*** (0.2415)

#> Fixed-Effects: ----------------- ------------------

#> Month Yes Yes
#> Day Yes Yes
#> __________________________ _________________ __________________
#> S.E.: Clustered by: Day by: Day

#> Observations 111 111

#> R2 0.58018 0.81604
#> Within R2 0.12074 0.61471
#> ---
#> Signif. codes: 0 '***' 0.001 '**' 0.01 '*' 0.05 '.' 0.1 ' ' 1

# in latex
etable(est, tex = T)
#> \begingroup
#> \centering
#> \begin{tabular}{lcccc}

#> \tabularnewline \midrule \midrule

#> Dependent Variable: & \multicolumn{4}{c}{Ozone (ppb)}\\
#> Model: & (1) & (2) & (3) & (4
#> \midrule
#> \emph{Variables}\\

#> Solar Radiation (Langleys) & 0.1148$^{***}$ & 0.0522$^{**}$ & 0.1078$^{***}$ & 0.
#> & (0.0234) & (0.0202) & (0.0329) & (0
#> Wind Speed (mph) & & -3.109$^{***}$ & & -3
#> & & (0.7986) & & (0
#> Temperature & & 1.875$^{***}$ & & 2.
#> & & (0.3671) & & (0

#> \midrule
#> \emph{Fixed-effects}\\
#> Month & Yes & Yes & Yes & Ye
#> Day & & & Yes & Ye
#> \midrule

#> \emph{Fit statistics}\\

#> Observations & 111 & 111 & 111 & 11
#> R$^2$ & 0.31974 & 0.63686 & 0.58018 & 0.

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#> Within R$^2$ & 0.12245 & 0.53154 & 0.12074 & 0.
#> \midrule \midrule
#> \multicolumn{5}{l}{\emph{Clustered (Day) standard-errors in parentheses}}\\

#> \multicolumn{5}{l}{\emph{Signif. Codes: ***: 0.01, **: 0.05, *: 0.1}}\\

#> \end{tabular}
#> \par\endgroup

# get the fixed-effects coefficients for 1 model

fixedEffects = fixef(est[[1]])
summary(fixedEffects)
#> Fixed_effects coefficients
#> Number of fixed-effects for variable Month is 5.
#> Mean = 19.6 Variance = 272

#>
#> COEFFICIENTS:
#> Month: 5 6 7 8 9
#> 3.219 8.288 34.26 40.12 12.13

# see the fixed effects for one dimension

fixedEffects$Month
#> 5 6 7 8 9
#> 3.218876 8.287899 34.260812 40.122257 12.130971

plot(fixedEffects)

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For multiple estimation

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# set up
library(fixest)

# let R know the base dataset (the biggest/ultimate dataset that includes everything in
base = iris

# rename variables
names(base) = c("y1","y2", "x1","x2", "species")

res_multi = feols(
c(y1, y2) ~ x1 + csw(x2, x2 ^ 2) |

sw0(species),
data = base,
fsplit = ~ species,
lean = TRUE,
vcov = "hc1" # can also clustered at the fixed effect level

)
# it's recommended to use vcov at estimation stage, not summary stage

summary(res_multi, "compact")
#> sample lhs fixef rhs (Intercept)

#> 1 Full sample y1 1 x1 + x2 4.19*** (0.104)

#> 2 Full sample y1 1 x1 + x2 + I(x2^2) 4.27*** (0.101)
#> 3 Full sample y1 species x1 + x2
#> 4 Full sample y1 species x1 + x2 + I(x2^2)
#> 5 Full sample y2 1 x1 + x2 3.59*** (0.103)
#> 6 Full sample y2 1 x1 + x2 + I(x2^2) 3.68*** (0.0969)

#> 7 Full sample y2 species x1 + x2

#> 8 Full sample y2 species x1 + x2 + I(x2^2)
#> 9 setosa y1 1 x1 + x2 4.25*** (0.474)
#> 10 setosa y1 1 x1 + x2 + I(x2^2) 4*** (0.504)
#> 11 setosa y1 species x1 + x2

#> 12 setosa y1 species x1 + x2 + I(x2^2)

#> 13 setosa y2 1 x1 + x2 2.89*** (0.416)
#> 14 setosa y2 1 x1 + x2 + I(x2^2) 2.82*** (0.423)
#> 15 setosa y2 species x1 + x2
#> 16 setosa y2 species x1 + x2 + I(x2^2)

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#> 17 versicolor y1 1 x1 + x2 2.38*** (0.423)

#> 18 versicolor y1 1 x1 + x2 + I(x2^2) 0.323 (1.44)
#> 19 versicolor y1 species x1 + x2

#> 20 versicolor y1 species x1 + x2 + I(x2^2)

#> 21 versicolor y2 1 x1 + x2 1.25*** (0.275)
#> 22 versicolor y2 1 x1 + x2 + I(x2^2) 0.097 (1.01)
#> 23 versicolor y2 species x1 + x2
#> 24 versicolor y2 species x1 + x2 + I(x2^2)

#> 25 virginica y1 1 x1 + x2 1.05. (0.539)

#> 26 virginica y1 1 x1 + x2 + I(x2^2) -2.39 (2.04)
#> 27 virginica y1 species x1 + x2
#> 28 virginica y1 species x1 + x2 + I(x2^2)
#> 29 virginica y2 1 x1 + x2 1.06. (0.572)
#> 30 virginica y2 1 x1 + x2 + I(x2^2) 1.1 (1.76)

#> 31 virginica y2 species x1 + x2

#> 32 virginica y2 species x1 + x2 + I(x2^2)
#> x1 x2 I(x2^2)
#> 1 0.542*** (0.0761) -0.32. (0.17)
#> 2 0.719*** (0.0815) -1.52*** (0.307) 0.348*** (0.0748)

#> 3 0.906*** (0.0759) -0.006 (0.163)

#> 4 0.9*** (0.0767) 0.29 (0.408) -0.0879 (0.117)
#> 5 -0.257*** (0.0664) 0.364* (0.142)
#> 6 -0.0301 (0.0778) -1.18*** (0.313) 0.446*** (0.0737)
#> 7 0.155* (0.0735) 0.623*** (0.114)

#> 8 0.148. (0.0755) 0.951* (0.472) -0.0973 (0.125)

#> 9 0.399 (0.325) 0.712. (0.418)
#> 10 0.405 (0.325) 2.51. (1.47) -2.91 (2.1)
#> 11 0.399 (0.325) 0.712. (0.418)
#> 12 0.405 (0.325) 2.51. (1.47) -2.91 (2.1)
#> 13 0.247 (0.305) 0.702 (0.56)

#> 14 0.248 (0.304) 1.27 (2.39) -0.911 (3.28)

#> 15 0.247 (0.305) 0.702 (0.56)
#> 16 0.248 (0.304) 1.27 (2.39) -0.911 (3.28)
#> 17 0.934*** (0.166) -0.32 (0.364)
#> 18 0.901*** (0.164) 3.01 (2.31) -1.24 (0.841)

#> 19 0.934*** (0.166) -0.32 (0.364)

#> 20 0.901*** (0.164) 3.01 (2.31) -1.24 (0.841)
#> 21 0.0669 (0.0949) 0.929*** (0.244)

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#> 22 0.048 (0.0993) 2.8. (1.65) -0.695 (0.583)

#> 23 0.0669 (0.0949) 0.929*** (0.244)
#> 24 0.048 (0.0993) 2.8. (1.65) -0.695 (0.583)

#> 25 0.995*** (0.0898) 0.00706 (0.205)

#> 26 0.994*** (0.0881) 3.5. (2.09) -0.87 (0.519)
#> 27 0.995*** (0.0898) 0.00706 (0.205)
#> 28 0.994*** (0.0881) 3.5. (2.09) -0.87 (0.519)
#> 29 0.149 (0.107) 0.535*** (0.122)

#> 30 0.149 (0.108) 0.503 (1.56) 0.00798 (0.388)

#> 31 0.149 (0.107) 0.535*** (0.122)
#> 32 0.149 (0.108) 0.503 (1.56) 0.00798 (0.388)

# call the first 3 estimated models only

etable(res_multi[1:3],

# customize the headers

headers = c("mod1","mod2","mod3"))
#> model 1 model 2 model 3
#> mod1 mod2 mod3

#> Dependent Var.: y1 y1 y1

#>
#> (Intercept) 4.191*** (0.1037) 4.266*** (0.1007)
#> x1 0.5418*** (0.0761) 0.7189*** (0.0815) 0.9059*** (0.0759)
#> x2 -0.3196. (0.1700) -1.522*** (0.3072) -0.0060 (0.1625)

#> x2 square 0.3479*** (0.0748)

#> Fixed-Effects: ------------------ ------------------ ------------------
#> species No No Yes
#> _______________ __________________ __________________ __________________
#> S.E. type Heteroskedas.-rob. Heteroskedas.-rob. Heteroskedas.-rob.
#> Observations 150 150 150

#> R2 0.76626 0.79456 0.83673

#> Within R2 -- -- 0.57179
#> ---
#> Signif. codes: 0 '***' 0.001 '**' 0.01 '*' 0.05 '.' 0.1 ' ' 1

12.4.6.2.1 Multiple estimation (Left-hand side)

When you have multiple interested dependent variables

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etable(feols(c(y1, y2) ~ x1 + x2, base))

#> model 1 model 2
#> Dependent Var.: y1 y2
#>
#> (Intercept) 4.191*** (0.0970) 3.587*** (0.0937)

#> x1 0.5418*** (0.0693) -0.2571*** (0.0669)

#> x2 -0.3196* (0.1605) 0.3640* (0.1550)
#> _______________ __________________ ___________________
#> S.E. type IID IID
#> Observations 150 150
#> R2 0.76626 0.21310

#> Adj. R2 0.76308 0.20240

#> ---
#> Signif. codes: 0 '***' 0.001 '**' 0.01 '*' 0.05 '.' 0.1 ' ' 1

To input a list of dependent variable

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depvars <- c("y1", "y2")

res <- lapply(depvars, function(var) {

res <- feols(xpd(..lhs ~ x1 + x2, ..lhs = var), data = base)
# summary(res)

})
etable(res)
#> model 1 model 2
#> Dependent Var.: y1 y2
#>
#> (Intercept) 4.191*** (0.0970) 3.587*** (0.0937)

#> x1 0.5418*** (0.0693) -0.2571*** (0.0669)

#> x2 -0.3196* (0.1605) 0.3640* (0.1550)
#> _______________ __________________ ___________________
#> S.E. type IID IID
#> Observations 150 150

#> R2 0.76626 0.21310

#> Adj. R2 0.76308 0.20240
#> ---
#> Signif. codes: 0 '***' 0.001 '**' 0.01 '*' 0.05 '.' 0.1 ' ' 1

12.4.6.2.2 Multiple estimation (Right-hand side)

Options to write the functions

sw (stepwise): sequentially analyze each elements

y ~ sw(x1, x2) will be estimated as y ~ x1 and y ~ x2

sw0 (stepwise 0): similar to sw but also estimate a model without the elements in the

set first

y ~ sw(x1, x2) will be estimated as y ~ 1 and y ~ x1 and y ~ x2

csw (cumulative stepwise): sequentially add each element of the set to the formula

y ~ csw(x1, x2) will be estimated as y ~ x1 and y ~ x1 + x2

csw0 (cumulative stepwise 0): similar to csw but also estimate a model without the

elements in the set first

y ~ csw(x1, x2) will be estimated as y~ 1 y ~ x1 and y ~ x1 + x2

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mvsw (multiverse stepwise): all possible combination of the elements in the set (it will get

large very quick).

mvsw(x1, x2, x3) will be sw0(x1, x2, x3, x1 + x2, x1 + x3, x2 + x3, x1 + x2 +
x3)

12.4.6.2.3 Split sample estimation

etable(feols(y1 ~ x1 + x2, fsplit = ~ species, data = base))

#> model 1 model 2 model 3
#> Sample (species) Full sample setosa versicolor

#> Dependent Var.: y1 y1 y1

#>
#> (Intercept) 4.191*** (0.0970) 4.248*** (0.4114) 2.381*** (0.4493)
#> x1 0.5418*** (0.0693) 0.3990 (0.2958) 0.9342*** (0.1693)
#> x2 -0.3196* (0.1605) 0.7121 (0.4874) -0.3200 (0.4024)

#> ________________ __________________ _________________ __________________

#> S.E. type IID IID IID
#> Observations 150 50 50
#> R2 0.76626 0.11173 0.57432
#> Adj. R2 0.76308 0.07393 0.55620

#>
#> model 4
#> Sample (species) virginica
#> Dependent Var.: y1
#>
#> (Intercept) 1.052* (0.5139)

#> x1 0.9946*** (0.0893)

#> x2 0.0071 (0.1795)
#> ________________ __________________
#> S.E. type IID
#> Observations 50

#> R2 0.74689
#> Adj. R2 0.73612
#> ---
#> Signif. codes: 0 '***' 0.001 '**' 0.01 '*' 0.05 '.' 0.1 ' ' 1

12.4.6.2.4 Standard Errors

iid : errors are homoskedastic and independent and identically distributed

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hetero : errors are heteroskedastic using White correction

cluster : errors are correlated within the cluster groups

newey_west : (Newey and West 1987) use for time series or panel data. Errors are

heteroskedastic and serially correlated.

vcov = newey_west ~ id + period where id is the subject id and period is time

period of the panel.

to specify lag period to consider vcov = newey_west(2) ~ id + period where we’re

considering 2 lag periods.

driscoll_kraay (Driscoll and Kraay 1998) use for panel data. Errors are cross-

sectionally and serially correlated.

vcov = discoll_kraay ~ period

conley : (Conley 1999) for cross-section data. Errors are spatially correlated

vcov = conley ~ latitude + longitude

to specify the distance cutoff, vcov = vcov_conley(lat = "lat", lon = "long",

cutoff = 100, distance = "spherical") , which will use the conley() helper

function.

hc : from the sandwich package

vcov = function(x) sandwich::vcovHC(x, type = "HC1"))

To let R know which SE estimation you want to use, insert vcov = vcov_type ~ variables

12.4.6.2.5 Small sample correction

To specify that R needs to use small sample correction add

ssc = ssc(adj = T, cluster.adj = T)

References

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