Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/282413 
Year of Publication: 
2023
Series/Report no.: 
CESifo Working Paper No. 10725
Publisher: 
Center for Economic Studies and ifo Institute (CESifo), Munich
Abstract: 
Under correlated heterogeneity, the commonly used two-way fixed effects estimator is biased and can lead to misleading inference. This paper proposes a new trimmed mean group (TMG) estimator which is consistent at the irregular rate of n 1/3 even if the time dimension of the panel is as small as the number of its regressors. Extensions to panels with time effects are provided, and a Hausman-type test of correlated heterogeneity is proposed. Small sample properties of the TMG estimator (with and without time effects) are investigated by Monte Carlo experiments and shown to be satisfactory and perform better than other trimmed estimators proposed in the literature. The proposed test of correlated heterogeneity is also shown to have the correct size and satisfactory power. The utility of the TMG approach is illustrated with an empirical application.
Subjects: 
correlated heterogeneity
irregular estimators
two-way fixed effects
FE-TE
tests of correlated heterogeneity
calorie demand
JEL: 
C21
C23
Document Type: 
Working Paper
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