Journal Of The Econometric Society

An International Society for the Advancement of Economic
Theory in its Relation to Statistics and Mathematics

Edited by: Guido W. Imbens • Print ISSN: 0012-9682 • Online ISSN: 1468-0262

Econometrica: Nov, 1981, Volume 49, Issue 6

Panel Data and Unobservable Individual Effects<1377:PDAUIE>2.0.CO;2-3
p. 1377-1398

Jerry A. Hausman, William E. Taylor

An important purpose in combining time-series and cross-section data is to control for individual-specific unobservable effects which may be correlated with other explanatory variables. Using exogeneity restrictions and the time-invariant characteristic of the latent variable, we derive (i) a test for the presence of this effect and for the over-identifying restrictions we use, (ii) necessary and sufficient conditions for identification, and (iii) the asymptotically efficient instrumental variables estimator and conditions under which it differs from the within-groups estimator. We calculate efficient estimates of a wage equation from the Michigan income dynamics data which indicate substantial differences from within-groups or Balestra-Nerlove estimates--particularly, a significantly higher estimate of the returns to schooling.

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