Smoothed LSDV Estimation of Functional-Coefficient Panel Data Models With Two-Way Fixed Effects

Document Type

Article

Publication Date

5-18-2020

Publication Title

Economics Letters

Volume

192

First page number:

1

Last page number:

5

Abstract

The existing semiparametric estimators for varying-coefficient fixed-effects models exclusively assume one-way fixed effects, typically in the dimension of cross-sectional units. However, more often than not applied researchers wish to control for both the individual and time fixed effects in their panel regressions, with the latter included to account for common unobservable factors correlated with regressors. While rather trivial in a linear model, controlling for time effects by explicitly including time-period dummies as additional regressors does not provide a straight-forward estimation procedure in the case of a semiparametric model. We provide an alternative by extending the Sun et al. (2009) smoothed least-squares dummy variable (LSDV) estimator to the case of a functional-coefficient model with two-way fixed effects whereby we allow for unobservable heterogeneity in both dimensions of the data: cross-section and time. Both fixed effects are concentrated out of the model via locally smoothed two-dimensional within transformation. Simulations show that the estimator performs well in finite samples. We also showcase its practical usefulness by revisiting the role of management as a factor of production.

Keywords

Fixed effect; Local linear; LSDV; Semiparametric; Smooth coefficient; Time effect

Disciplines

Economics

Language

English

Comments

A corrigendum to this article was published in December 2021. It relates to the last paragraph of Section 2 of this article and can be found at the following at this link.

Rights

IN COPYRIGHT. For more information about this rights statement, please visit http://rightsstatements.org/vocab/InC/1.0/

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