Re: st: Clustering Standard Errors versus Dummies

[natasha agarwal <agarwana2@googlemail.com>]

On Thu, Jul 1, 2010 at 8:17 PM, Christopher Baum <kit.baum@bc.edu> wrote:
> <>
> Natasha asks:
>
> Can anyone please explain me the difference between clustering the
> standard errors and including dummies.
>
> So for example if am estimating an augmented production function on an
> unbalanced panel dataset where I observe firms over time and I include
> firm specific fixed effects. Can anyone please explain me the need
> then to cluster the standard errors at the firm level?
>
> Different assumptions are involved with dummies vs. clustering.
>
> Including dummies (firm-specific fixed effects) deals with unobserved heterogeneity at the firm level that if ignored
> would render your POINT estimates inconsistent. Assuming i.i.d. errors (as xtreg, fe does, as it is just OLS)
> may lead to significant bias in the INTERVAL estimates (that is, standard errors) if there are significant within-panel
> error correlations (that is, firm i's error is correlated over time with other errors of firm i).

Cameroon et al., (2010) in their paper on "Robust Inference with
Clustered Data" mentions that "in a state-year panel of individuals
(with dependent variable y(ist)) there may be clustering both within
years and within states. IF the within-year clustering is due to
shocks that are the same across all individuals in a given year, then
including year fixed effects as regressors will absorb within-year
clustering and inference then need only clustering on state)"

Does this imply then that if I cluster by time as well, then I do not
need to include year fixed effects?

Natasha


> I am working, with coauthors Mark Schaffer and Austin Nichols, on a presentation on clustering for the July BOS'10 Stata Conference. It will be available on the web after the conference.
>
> Kit
>
>
>
> Kit Baum   |   Boston College Economics & DIW Berlin   |   http://ideas.repec.org/e/pba1.html
>                              An Introduction to Stata Programming  |   http://www.stata-press.com/books/isp.html
>   An Introduction to Modern Econometrics Using Stata  |   http://www.stata-press.com/books/imeus.html
>
>
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