Thursday, March 02, 2006

Re: st: fixed effects with clustering when the number of levels of variable to be absorbed exceeds number of clusters

Mark Schaffer and I had a short conversation off-list, and it seems that neither of us is sure what the consequences are when the number of levels of the absorb() variable used in -areg-, or the number of panel fixed effects more generally, exceeds the number of clusters. By "consequences" I am thinking specifically of interpreting the standard errors on multiple coefficients (which is really the point of using the -cluster- option, isn't it), or using the less-than-full-rank \hat{Var(\beta)} to test hypotheses.

Does anyone else want to weigh in?

Here is an interesting response from Gustavo Sanchez, Stata employee, to a question about the text I copied from -help areg- into my first message in this thread: _______________________________________________ Dear Austin,

Thanks for taking the time to bring this to our attention.

You wrote: Apparently, the help file for -areg- contains an inaccurate caution, quoted twice in the attached email thread, and beginning "Note: Exercise caution..."

The note is actually out of date and it will be removed from the manual.

There were some previous simulation results that supported the explanation in the FAQ. Our development staff is continuously checking for new theoretical and empirical developments. When new results provide evidence that may affect the performance of the estimators implemented in Stata, the corresponding command might be modified to incorporate those advances that are already theoretically and empirically tested.

In order to learn about the changes in our fixed effects estimator, type, "help whatsnew", then, scroll down to "update 15sep2005" and read item (30) on the Ado-files updates. This changes were made to -xtreg- but -areg- was also modified accordingly.

Finally, let me point out that -xtreg- is a newer command and it is part of our panel data [xt] commands. In general, any improvements to our fixed effects estimator for linear regression are going to be mainly developed on -xtreg- (although we would ensure the same behavior for the common options in -areg-). Thus I would suggest that you use -xtreg- instead of -areg- unless you are interested in particular features of this last command that are not present in the former.

Please, let me know if you have any further questions Sincerely,

Gustavo

___ ____ ____ ____ ____ Gustavo Sanchez, Ph.D. /__ / ____/ / ____/ Statistician ___/ / /___/ / /___/ tech-support@stata.com StataCorp LP 4905 Lakeway Drive College Station TX 77845 _______________________________________________

Final Note (from me, not Gustavo): An important distinction is that -areg- allows all weights except iweights, which is not true of -xtreg, fe- so I would dispute the generality of the claim implied by this line in -help areg-: "Note: See the command xtreg, fe in xtreg for an improved version of areg."

* * For searches and help try: * http://www.stata.com/support/faqs/res/findit.html * http://www.stata.com/support/statalist/faq * http://www.ats.ucla.edu/stat/stata/


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