First-differencing in panel data models with incidental functions

Koen Jochmans (1)

1 ECON - Département d'économie (Sciences Po)

I discuss the fixed-effect estimation of panel data models with time-varying excess heterogeneity across cross-sectional units. These latent components are not given a parametric form. A modification to traditional first-differencing is motivated which, asymptotically, removes the permanent unobserved heterogeneity from the differenced model. Conventional estimation techniques can then be readily applied. Distribution theory for a kernel-weighted GMM estimator under large-n and fixed-T asymptotics is developed. The estimator is put to work in a series of numerical experiments to static and dynamic models.

Keywords: dynamic panel data; GMM; incidental functions; local first- differencing; time-varying fixed effects; nonparametric heterogeneity.; nonparametric heterogeneity

Domains: Economics and Finance

Koen Jochmans. First-differencing in panel data models with incidental functions. 2010. ⟨hal-01069454⟩