Time-invariant Regressors under Fixed Effects: Identification via a Proxy Variable
CERGE-EI Working Paper Series No. 624
17 Pages Posted: 25 Oct 2018
Date Written: September 1, 2018
Identification of a coefficient associated with a time-invariant regressor (TIR) often relies on the assumption that the TIR is uncorrelated with the unobserved heterogeneity across panel units. We derive an estimator which avoids the random-effects assumption by employing a proxy for the unobserved heterogeneity thus extending the existing results on proxy variables from the cross-sectional literature. In addition, we quantify the sensitivity of the estimates to potential violations of the random-effects assumption when no proxy is available. The utility of this approach is illustrated on the problem of implausibly high distance elasticity produced by gravity models of international trade.
Keywords: Identification; Model specification; Omitted variable bias; Panel data; Variable addition
JEL Classification: C01, C18, C33
Suggested Citation: Suggested Citation