Time-invariant Regressors under Fixed Effects: Identification via a Proxy Variable

CERGE-EI Working Paper Series No. 624

17 Pages Posted: 25 Oct 2018

See all articles by Matěj Bělín

Matěj Bělín

Charles University in Prague - CERGE-EI (Center for Economic Research and Graduate Education - Economics Institute)

Date Written: September 1, 2018

Abstract

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

Bělín, Matěj, Time-invariant Regressors under Fixed Effects: Identification via a Proxy Variable (September 1, 2018). CERGE-EI Working Paper Series No. 624, Available at SSRN: https://ssrn.com/abstract=3253779 or http://dx.doi.org/10.2139/ssrn.3253779

Matěj Bělín (Contact Author)

Charles University in Prague - CERGE-EI (Center for Economic Research and Graduate Education - Economics Institute) ( email )

P.O. Box 882
7 Politickych veznu
Prague 1, 111 21
Czech Republic

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