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AN ALTERNATIVE DERIVATION OF MUNDLAK'S FIXED EFFECTSRESULTS USING SYSTEM ESTIMATION

Published online by Cambridge University Press:  03 November 2006

Badi H. Baltagi
Badi H. Baltagi
Affiliation:
Syracuse University
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Abstract

Mundlak (1978,Econometrica 46, 69–85) showed that the fixedeffects estimator can be obtained as generalized least squares (GLS)for a panel regression model where the individual effects are randombut are all hopelessly correlated with theregressors. This result was obtained by partitioned inversion aftersubstituting the reduced form expression for the individual effectsas a function of the means of all the regressors.This note shows that Mundlak's result can be obtained usingsystem estimation without using partitionedinversion. System estimation has proved useful for derivingtwo-stage least squares (2SLS) and three-stage least squares (3SLS)counterparts for the random effects panel models by Baltagi (1981, Journal ofEconometrics 17, 189–200). It also has been used forobtaining an alternative derivation of the Hausman tests that isrobust to heteroskedasticity of unknown form (see Arellano, 1993, Journal ofEconometrics 59, 87–97) and more recently, forobtaining generalized method of moments (GMM) estimators for dynamicpanel models (see Arellano and Bover, 1995, Journal of Econometrics 68, 29–51;and Blundell and Bond, 1998,Journal of Econometrics 87, 115–143, to mentiona few). We also show that a necessary and sufficient condition forordinary least squares (OLS) to be equivalent to GLS is satisfiedfor this model.

Information

Type
NOTES AND PROBLEMS
Information
Econometric Theory , Volume 22 , Issue 6 , December 2006 , pp. 1191 - 1194
Copyright
© 2006 Cambridge University Press

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References

REFERENCES

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