Apologies for revisiting a topic which has been visited on several occasions over the last couple of years, but could I ask if anyone can clarify the current thinking regarding the relationship between
-areg-
-xtreg-
and the -,cluster()- option.
(1) Since -xtreg, fe- and -areg- are equivalent, why is it not possible to request robust standard errors with -xtreg, fe- but it is possible with -areg-?
[This question was also asked on Statalist by <[email protected]> in November 2003, but I could not track down any answer.]
(2) The manual warns us that the number of levels in the absorb() variable should not exceed the number of clusters. ([R] areg, p.85). However, there is a FAQ at
http://www.stata.com/support/faqs/stat/aregclust.html
which concludes that "Further review has shown that cluster() can be combined with areg, even if the clusters match the fixed-effects."
This FAQ is dated 18 May 2004. Is the caution in the manual still good advice? Does the FAQ imply that one can actually have more fixed-effects than clusters?
It seems that this would be a common requirement in a model where one has more than one level of aggregation (e.g. workers and firms, pupils and schools), and one estimates a model which controls for the lower level using fixed-effects but allows for correlation in the errors at the higher level. Thus the number of clusters would generally be (much) smaller than the number of fixed-effects.
(3) Finally, is the problem simply one of a degrees-of-freedom correction which can easily be implemented post-estimation? For example, could one "within-transform" the data and estimate a simple -regress, cluster()- command and then do the standard D.o.F. correction which takes into account the number of fixed-effects? Or could one do this correction directly after -areg, cluster()- without transforming the data?
Any clarification on these issues would be gratefully received.
Richard
Richard Upward
School of Economics
University of Nottingham
University Park
Nottingham NG7 2RD
Tel: +44 (0) 115 95 14735
http://www.nottingham.ac.uk/economics/staff/details/richard_upward.html
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