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Not so harmless after all : the fixed-effects model
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Plümper, Thomas and Troeger, Vera (2019) Not so harmless after all : the fixed-effects model. Political Analysis, 27 (1). pp. 21-45. doi:10.1017/pan.2018.17
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WRAP-not-so-harmless-fixed-effects-Toreger-2018.pdf - Accepted Version - Requires a PDF viewer. Download (761Kb) | Preview |
Official URL: https://doi.org/10.1017/pan.2018.17
Abstract
The fixed-effects estimator is biased in the presence of dynamic misspecification and omitted within variation correlated with one of the regressors. We argue and demonstrate that fixed-effects estimates can amplify the bias from dynamic misspecification and that with omitted time-invariant variables and dynamic misspecifications, the fixed-effects estimator can be more biased than the ‘naïve’ OLS model. We also demonstrate that the Hausman test does not reliably identify the least biased estimator when time-invariant and time-varying omitted variables or dynamic misspecifications exist. Accordingly, empirical researchers are ill-advised to rely on the Hausman test for model selection or use the fixed-effects model as default unless they can convincingly justify the assumption of correctly specified dynamics. Our findings caution applied researchers to not overlook the potential drawbacks of relying on the fixed-effects estimator as a default. The results presented here also call upon methodologists to study the properties of estimators in the presence of multiple model misspecifications. Our results suggest that scholars ought to devote much more attention to modeling dynamics appropriately instead of relying on a default solution before they control for potentially omitted variables with constant effects using a fixed-effects specification.
| Item Type: | Journal Article | ||||||||
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| Subjects: | H Social Sciences > HB Economic Theory Q Science > QA Mathematics |
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| Divisions: | Faculty of Social Sciences > Economics | ||||||||
| Library of Congress Subject Headings (LCSH): | Economics -- Mathematical models, Econometrics -- Mathematical models, Monte Carlo method | ||||||||
| Journal or Publication Title: | Political Analysis | ||||||||
| Publisher: | Cambridge University Press | ||||||||
| ISSN: | 1047-1987 | ||||||||
| Official Date: | January 2019 | ||||||||
| Dates: |
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| Volume: | 27 | ||||||||
| Number: | 1 | ||||||||
| Page Range: | pp. 21-45 | ||||||||
| DOI: | 10.1017/pan.2018.17 | ||||||||
| Status: | Peer Reviewed | ||||||||
| Publication Status: | Published | ||||||||
| Reuse Statement (publisher, data, author rights): | This article has been published in a revised form in Political Analysis https://doi.org/10.1017/pan.2018.17. This version is free to view and download for private research and study only. Not for re-distribution, re-sale or use in derivative works. © The Author(s) 2018. Published by Cambridge University Press on behalf of the Society for Political Methodology. | ||||||||
| Access rights to Published version: | Restricted or Subscription Access | ||||||||
| Copyright Holders: | Copyright © The Author(s) 2018. Published by Cambridge University Press on behalf of the Society for Political Methodology. |
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