To add more detail:
Two of the assumptions underlying the random effects model are that:
1. the unobservable effects are not correlated with the explanatory variables
2. the residuals have the random effects structure
The second assumption is not required for consistency.
Wooldridge's argument is: then why impose it. "With fixed T and large N asymptotics, we lose nothing in using robust standard errors and test statistics even if [the random effects error structure] holds".
Eric
Eric de Souza
College of Europe
Brugge (Bruges), Belgium
http://www.coleurope.eu
-----Original Message-----
From: [email protected] [mailto:[email protected]] On Behalf Of David M. Drukker
Sent: 19 August 2009 19:04
To: [email protected]
Subject: RE: st: Stata 11 Random Effects--Std. Errors
Continuing the thread about why -xtreg .., re vce(robust)- changed its meaning between Stata 10 and Stata 11, Mark E Schaffer <[email protected]> asked for a citation.
Wooldridge (2002, section 10.4.2) recommends the new approach of having
-vce(robust)- mean -vce(cluster panelvar)-.
When we first offered the -vce(robust)- and -vce(cluster clustvar)- on -xtreg, re-, we wanted to offer users the flexibility to use either estimator. We had Monte Carlo simulations showing that there are data generating processes for which -vce(robust)- performs quite well, so we allowed users to choose.
Since we first offered these options, the literature has focused on always using -vce(cluster panelvar)- to obtain a "robust" estimator for -xtreg, re-. We made the change because the new method is what users now expect and it offers additional generality.
David
[email protected]
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