Inference on Time-Invariant Variables using Panel Data: A Pre-Test Estimator with an Application to the Returns to Schooling

Jean-Bernard Chatelain (1) , Kirsten Ralf (2)

1 CES - Centre d'économie de la Sorbonne
2 PSE - Paris-Jourdan Sciences Economiques

This paper proposes a new pre-test estimator of panel data models including time invariant variables based upon the Mundlak-Krishnakumar estimator and an "unrestricted” Hausman-Taylor estimator. The paper evaluates the biases of currently used restricted estimators, omitting the average-over-time of at least one endogenous time-varying explanatory variable. Repeated Between, Ordinary Least Squares, Two stage restricted Between and Oaxaca-Geisler estimator, Fixed Effect Vector Decomposition, Generalized least squares may lead to wrong conclusions regarding the statistical significance of the estimated parameter values of time-invariant variables.

Keywords: Mundlak Estimator; Pre-Test Estimator; Time-Series Cross-Sections; Panel data; Time-Invariant Variables; Fixed Effects Vector Decomposition

Domains: Economics and Finance; Education; Methods and statistics; Methodology [stat.ME]; Statistics Theory [stat.TH]; Statistics [math.ST]; Applications [stat.AP]

Jean-Bernard Chatelain, Kirsten Ralf. Inference on Time-Invariant Variables using Panel Data: A Pre-Test Estimator with an Application to the Returns to Schooling. 2010. ⟨hal-00492039⟩