Bias corrected instrumental variables estimation for dynamic panel models with fixed effects

78 Pages·2001·2.3 MB·English

by  Hahn, Jinyong

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Massachusetts Institute of Technology
Department of Economics
Working Paper Series
BIAS CORRECTED INSTRUMENTAL
VARIABLES ESTIMATION FOR DYNAMIC PANEL
MODELS WITH FIXED EFFECTS
Jinyong Hahn
Hausman
Jerry
Guido Kuersteiner
Working Paper 01 -24
June 2001
Room
E52-251
50 Memorial Drive
MA
Cambridge, 02142
This paper can be downloaded without charge from the
Social Science Research Network Paper Collection at
http://papers.ssm.com/paper.taf?abstract id=276592
MASSACHUSEHS INSTITUTE
OFTECHNOLOGY
AUG 1 5 2001
LIBRARIES
Massachusetts Institute of Technology
Department of Economics
Working Paper Series
BIAS CORRECTED INSTRUMENTAL
VARIABLES ESTIMATION FOR DYNAMIC PANEL
MODELS WITH FIXED EFFECTS
Jinyong Hahn
Hausman
Jerry
Guide Kuersteiner
Working Paper 01 -24
June 2001
Room
E52-251
50 Memorial Drive
MA
Cambridge, 021 42
This paper can be downloaded without charge from the
Social Science Research Network Paper Collection at
http://papers.ssm.com/paper.taf?abstract id=276592

Bias Corrected Instrumental Variables Estimation for Dynamic
Panel Models with Fixed Effects
Jinyong Hahn Jerry Hausman Guido Kuersteiner
Brown University MIT MIT
June, 2001
Acknowledgment: We are grateful to Yu Hu for exceptional research assistance. Helpful
comments by Guido Imbens, Whitney Newey, James Powell, and participants of workshops at
Arizona State University, Berkeley Harvard/MIT, Maryland, Triangle, UCL, UCLA, UCSD are
appreciated.
Abstract
This paper analyzes the second order bias of instrumental variables estimators for a dynamic
panel model with fixed effects. Three different methods of second order bias correction are
considered. Simulation experiments show that these methods perform well if the model does
not have a root near unity but break down near the unit circle. To remedy the problem near
the unit root a weak instrument approximation is used. We show that an estimator based on
long differencing the model is approximately achieving the minimal bias in a certain class of
instrumental variables (IV) estimators. Simulation experiments document the performance of
the proposed procedure in finite samples.
Keywords: dynamic panel, bias correction, second order, unit root, weak instrument
JEL: C13, C23, C51