In This Chapter
Reducing bias by using panel data
Understanding the difference between fixed effects and random effects estimation
Using the Hausman test results to choose the appropriate panel model
Like pooled cross-sectional data (which I cover in Chapter 16), panel (or longitudinal) data also includes both cross-sectional and time-series dimensions. The fundamental difference is that the identical cross-sectional units (individuals, firms, cities, countries, and so on) are included in each time period during which data are collected rather than randomly selecting a cross-sectional group in each time period. Examples of well-known panel datasets include the National Longitudinal Surveys (NLS), the Panel Study of Income Dynamics (PSID), and the Survey of Income and Program Participation (SIPP).
In this chapter, you discover how panel econometric analysis helps you deal with the elusive omitted variable problem that can be present in both cross-sectional and time-series regression analysis. You also see how software can be used to implement these procedures and appropriately deal with the special challenges that arise with panel-data analysis.