Working Paper

Robust priors in nonlinear panel data models

Authors

Manuel Arellano, Stéphane Bonhomme

Published Date

21 March 2007

Type

Working Paper (CWP07/07)

Many approaches to estimation of panel models are based on an average or integrated likelihood that assigns weights to different values of the individual effects. Fixed effects, random effects, and Bayesian approaches all fall in this category. We provide a characterization of the class of weights (or priors) that produce estimators that are first-order unbiased. We show that such bias-reducing weights must depend on the data unless an orthogonal reparameterization or an essentially equivalent condition is available. Two intuitively appealing weighting schemes are discussed. We argue that asymptotically valid confidence intervals can be read from the posterior distribution of the common parameters when N and T grow at the same rate. Finally, we show that random effects estimators are not bias reducing in general and discuss important exceptions. Three examples and some Monte Carlo experiments illustrate the results.


Latest version

Robust priors in nonlinear panel data models
Manuel Arellano, Stéphane Bonhomme
CWP