General introduction

Panel Data Econometrics

Master of Science in Economics - University of Geneva

Christophe Hurlin, Universit dOrlans

University of Orlans

January 2010

C. Hurlin

Panel Data Econometrics

General introduction

Denitions
What are the main advantages of the panel data sets and the panel d
Issues involved in utilizing panel data
Outline of the lecture

General introduction

Denition
A longitudinal, or panel, data set is one that follows a given sample
of individuals over time, and thus provides multiple observations on
each individual in the sample. (Hsiao,2003, page 2).

C. Hurlin

Panel Data Econometrics

General introduction

Denitions
What are the main advantages of the panel data sets and the panel d
Issues involved in utilizing panel data
Outline of the lecture

General introduction

Terminology and notations:

Individual or cross section unit : country, region, state,
rm, consumer, individual, couple of individuals or countries
(gravity models) etc.
Double index : i (for cross-section unit) and t (for time)
yit for i = 1, .., N and t = 1, .., T

C. Hurlin

Panel Data Econometrics

General introduction

Denitions
What are the main advantages of the panel data sets and the panel d
Issues involved in utilizing panel data
Outline of the lecture

General introduction
Denitions
A micro-panel data set is a panel for which the time dimension T
is largely less important than the individual dimension N (example:
the University of Michigans Panel Study of Income Dynamics,
PSID with 15,000 individuals observed since 1968):
T << N
A macro-panel data set is a panel for which the time dimension T
is similar to the individual dimension N (example: a panel of 100
countries with quateraly data since the WW2):
T 'N
C. Hurlin

Panel Data Econometrics

General introduction

Denitions
What are the main advantages of the panel data sets and the panel d
Issues involved in utilizing panel data
Outline of the lecture

General introduction

Denition
A panel is said to be balanced if we have the same time periods,
t = 1, .., T , for each cross section observation. For an unbalanced
panel, the time dimension, denoted Ti , is specic to each
individual.
Remark: While the mechanics of the unbalanced case are similar
to the balanced case, a careful treatment of the unbalanced case
requires a formal description of why the panel may be unbalanced,
and the sample selection issues can be somewhat subtle. =>
issues of sample selection and attrition.

C. Hurlin

Panel Data Econometrics

General introduction

Denitions
What are the main advantages of the panel data sets and the panel d
Issues involved in utilizing panel data
Outline of the lecture

General introduction

What are the main advantages of the panel data

sets and the panel data models?

C. Hurlin

Panel Data Econometrics

General introduction

Denitions
What are the main advantages of the panel data sets and the panel d
Issues involved in utilizing panel data
Outline of the lecture

General introduction

Panel data sets for economic research possess several major

advantages over conventional cross-sectional or time-series data
sets (see Hsiao 2003)
Hsiao, C., (2003), Analysis of Panel Data, second edition,
Cambridge Universirty Press.
Wooldridge J.M., (2001), Econometric Analysis of Cross
Section and Panel Data, The MIT Press.

C. Hurlin

Panel Data Econometrics

General introduction

Denitions
What are the main advantages of the panel data sets and the panel d
Issues involved in utilizing panel data
Outline of the lecture

General introduction
What are the main advantages of the panel data sets and
the panel data models?
1

Panel data usually give the researcher a large number of

data points (N T ), increasing the degrees of freedom and
reducing the collinearity among explanatory variables hence
improving the e ciency of econometric estimates => but it is
a kind of phantasm.... more data points doesnt necessarily
imply more information (heterogeneity bias)!!

More importantly, longitudinal data allow a researcher to

analyze a number of important economic questions that
cannot be addressed using cross-sectional or time-series data
sets.
C. Hurlin

Panel Data Econometrics

General introduction

Denitions
What are the main advantages of the panel data sets and the panel d
Issues involved in utilizing panel data
Outline of the lecture

General introduction

What are the main advantages of the panel data sets and
the panel data models?
Denition
The oft-touted power of panel data derives from their theoretical
ability to isolate the eects of specic actions, treatments, or more
general policies.

C. Hurlin

Panel Data Econometrics

General introduction

Denitions
What are the main advantages of the panel data sets and the panel d
Issues involved in utilizing panel data
Outline of the lecture

General introduction
Example (Ben-Porath (1973), in Hsiao (2003))
Suppose that a cross-sectional sample of married women is found
to have an average yearly labor-force participation rate of 50%.
1 ) It might be interpreted as implying that each woman in a
homogeneous population has a 50 percent chance of being in the
labor force in any given year.
2 ) It might imply that 50 percent of the women in a
heterogeneous population always work and 50 percent never work.

To discriminate between these two models, we need to utilize

individual labor-force histories (the time dimension) to
estimate the probability of participation in dierent subintervals of
the life cycle.
C. Hurlin

Panel Data Econometrics

General introduction

Denitions
What are the main advantages of the panel data sets and the panel d
Issues involved in utilizing panel data
Outline of the lecture

General introduction
What are the main advantages of the panel data sets and
the panel data models?
3. Panel data data provides a means of resolving the magnitude
of econometric problems that often arises in empirical studies,
namely the often heard assertion that the real reason one
nds (or does not nd) certain eects is the presence of
omitted (mismeasured or unobserved) variables that are
correlated with explanatory variables.
Panel data allows to control for omitted (unobserved or
mismeasured) variables.

C. Hurlin

Panel Data Econometrics

General introduction

Denitions
What are the main advantages of the panel data sets and the panel d
Issues involved in utilizing panel data
Outline of the lecture

General introduction
Example
Example: let us consider a simple regression model.
yit = + 0 xit + 0 zit + it

i = 1, .., N

t = 1, .., T

where
xit and zit are k1 1 and k2 1 vectors of exogeneous
variables
is a constant, and are k1 1 and k2 1 vectors of
parameters
it is i.i.d. over i and t, with V (it ) = 2
Let us assume that zit variables unobservable and
correlated with xit
cov (xit , zit ) 6= 0
C. Hurlin

Panel Data Econometrics

General introduction

Denitions
What are the main advantages of the panel data sets and the panel d
Issues involved in utilizing panel data
Outline of the lecture

General introduction
Example (II): It is well known the least-squares regression
coe cients of yit on xit are biaised.
Let us assume that zi ,t = zi (z values stay constant throught time
for a given individual but vary accross individuals).
yit = + 0 xit + 0 zi + it

i = 1, .., N

t = 1, .., T

Then, we can take the rst dierence of individual observations

over time :
yit

yi ,t

= 0 (xit

xi ,t

1 ) + it

i ,t

Least squares regression now provides unbiased and

consistent estimates of .
C. Hurlin

Panel Data Econometrics

General introduction

Denitions
What are the main advantages of the panel data sets and the panel d
Issues involved in utilizing panel data
Outline of the lecture

General introduction
Example (III): Let us assume that zi ,t = zt (z values are common
for all individuals but vary accross time: common factors).
yit = + 0 xit + 0 zt + it

i = 1, .., N

t = 1, .., T

Then, we can take deviation from the mean across individuals at a

given time :
yit y t = 0 (xit x t ) + it t
where
y t = (1/N ) N
i =1 yit

x t = (1/N ) N
i =1 xit

t = (1/N ) N
i =1 it

Least squares regression now provides unbiased and

consistent estimates of .
C. Hurlin

Panel Data Econometrics

General introduction

Denitions
What are the main advantages of the panel data sets and the panel d
Issues involved in utilizing panel data
Outline of the lecture

General introduction

What are the main advantages of the panel data sets and
the panel data models?
4. Panel data involve two dimensions: a cross-sectional
dimension N, and a time-series dimension T . We would
expect that the computation of panel dataestimators would be
more complicated than the analysis of cross-section data
alone (where T = 1) or time series data alone (where
N = 1). However, in certain cases the availability of panel
data can actually simplify the computation and inference.

C. Hurlin

Panel Data Econometrics

General introduction

Denitions
What are the main advantages of the panel data sets and the panel d
Issues involved in utilizing panel data
Outline of the lecture

General introduction
Example (time-series analysis of nonstationary data)
Let us consider a simple AR (1) model.
xt = xt

+ t

where the innovation t is i.i.d. 0, 2 . Under the non

stationarity, assumption = 1, it is well known that the
asymptotic distribution of the OLS estimator b
is given by:
T (b

1)

T !

1 W (1)2 1
R
2 1 W (r )2 dr
0

where W (.) denotes a standard brownian motion.

C. Hurlin

Panel Data Econometrics

General introduction

Denitions
What are the main advantages of the panel data sets and the panel d
Issues involved in utilizing panel data
Outline of the lecture

General introduction

Example (time-series analysis of nonstationary data)

Hence, the behavior of the usual test statistics will often have to
be inferred through computer simulations. But if panel data are
available, and observations among cross-sectional units are
independent, then one can invoke the central limit theorem across
cross-sectional units to show that the limiting distributions of
many estimators remain asymptotically normal and the
Waldtype test statistics are asymptotically chi-square
distributed (e.g., Levin and Lin (1993); Im, Pesaran, Shin (1999),
Phillips and Moon (1999, 2000); Quah (1994) etc.).

C. Hurlin

Panel Data Econometrics

Denitions
What are the main advantages of the panel data sets and the panel d
Issues involved in utilizing panel data
Outline of the lecture

General introduction

General introduction

Example (time-series analysis of nonstationary data)

Let us consider the panel data model
xi ,t = xi ,t

+ i ,t

where the innovation i ,t is i.i.d. 0, 2 over i and t, then:

T

N (b

1)

C. Hurlin

! N (0, 2)

N ,T !

Panel Data Econometrics

General introduction

Denitions
What are the main advantages of the panel data sets and the panel d
Issues involved in utilizing panel data
Outline of the lecture

General introduction

Issues involved in utilizing panel data

C. Hurlin

Panel Data Econometrics

General introduction

Denitions
What are the main advantages of the panel data sets and the panel d
Issues involved in utilizing panel data
Outline of the lecture

General introduction

There are three main issues in utilizing panel data:

1

Heterogeneity bias => Chapter 1

Dynamic panel data models (Nickel, 1981, bias) =>

Chapter 2
3

Selectivity bias (not specic to panel data models)

C. Hurlin

Panel Data Econometrics

General introduction

Denitions
What are the main advantages of the panel data sets and the panel d
Issues involved in utilizing panel data
Outline of the lecture

General introduction

The heterogeneity bias.

When important factors peculiar to a given individual are left out,
the typical assumption that economic variable y is generated by a
parametric probability distribution function P (Y j )), where is
an m-dimensional real vector, identical for all individuals at
all times, may not be a realistic one.

C. Hurlin

Panel Data Econometrics

General introduction

Denitions
What are the main advantages of the panel data sets and the panel d
Issues involved in utilizing panel data
Outline of the lecture

General introduction

The heterogeneity bias.

Ignoring the individual or time-specic eects that exist among
cross-sectional or time-series units but are not captured by the
included explanatory variables can lead to parameter
heterogeneity in the model specication.

C. Hurlin

Panel Data Econometrics

General introduction

Denitions
What are the main advantages of the panel data sets and the panel d
Issues involved in utilizing panel data
Outline of the lecture

General introduction
Example
Let us consider the example of a simple production function (Cobb
Douglas) with two factors (labor and capital). We have N
countries and T periods. Let us denote:
- yit the log of the GDP for country i at time t.
- nit the log of the labor employment for country i at time t.
- yit the log of the capital stock for country i at time t.
yi ,t = i + i ki ,t + i ni ,t + i ,t
with i ,t i.i.d. 0, 2 , 8 i, 8 t.

C. Hurlin

Panel Data Econometrics

General introduction

Denitions
What are the main advantages of the panel data sets and the panel d
Issues involved in utilizing panel data
Outline of the lecture

General introduction
Example
In this specication, the elasticities i and i are specic to each
country
yi ,t = i + i ki ,t + i ni ,t + i ,t
with i ,t i.i.d. 0, 2 , 8 i, 8 t. But, several alternative
specications can be considered. First, we can assume that the
production function is the same for all countries: in this case we
have an homogeneous specication:
yi ,t = + ki ,t + ni ,t + i ,t
i =

i =

C. Hurlin

i =

Panel Data Econometrics

General introduction

Denitions
What are the main advantages of the panel data sets and the panel d
Issues involved in utilizing panel data
Outline of the lecture

Example
However, an homogeneous specication of the production function
for macro aggregated data is meaningless. We can introduce an
heterogeneity of the Total Factor Productivity: more precisely, we
can assume that the mean of TFP (given by E (i + i ,t ) = i ) is
dierent accross countries (due to institutional organisational
factors, etc.).
Then, we can use a specication with individual eects, i and
common slope parameters (elasticities and ).
yi ,t = i + ki ,t + ni ,t + i ,t
i =

C. Hurlin

i =

Panel Data Econometrics

General introduction

Denitions
What are the main advantages of the panel data sets and the panel d
Issues involved in utilizing panel data
Outline of the lecture

Example
Finally, we can assume that the labor and/or capital elasticities are
dierent accross countries.In this case, we will have an
heterogeneous specication of the panel data model
(heterogeneous panel).
yi ,t = i + i ki ,t + i ni ,t + i ,t

C. Hurlin

Panel Data Econometrics

General introduction

Denitions
What are the main advantages of the panel data sets and the panel d
Issues involved in utilizing panel data
Outline of the lecture

Example
In this case, there are two solutions:
1 ) The rst solution consists in using N times series models to
produce some group-mean estimates of the elasticities.
2 ) The second solution consists in using a model with random
(slope) parameters => random coe cient model. In this
case, we assume that parameters i and i and randomly
distributed, but follows the same distribution:
i i.i.i

, 2

C. Hurlin

i i.i.i

, 2

Panel Data Econometrics

General introduction

Denitions
What are the main advantages of the panel data sets and the panel d
Issues involved in utilizing panel data
Outline of the lecture

The heterogeneity bias.

Fact
Ignoring such heterogeneity (in slope and/or constant) could lead
to inconsistent or meaningless estimates of interesting parameters.

C. Hurlin

Panel Data Econometrics

General introduction

Denitions
What are the main advantages of the panel data sets and the panel d
Issues involved in utilizing panel data
Outline of the lecture

The heterogeneity bias.

Let us consider a simple linear with individual eects and only one
explicative variable xi (common slope) as a DGP.
yit = i + xit + it
Let us assume that all NT observations fxit , yit g are used to
estimate the homogeneous model.
yit = + xit + it

C. Hurlin

Panel Data Econometrics

General introduction

Denitions
What are the main advantages of the panel data sets and the panel d
Issues involved in utilizing panel data
Outline of the lecture

General introduction

The heterogeneity bias.

Source: Hsiao (2003)

Broken ellipses= point scatter for an individual over time
Broken straight lines = individual regressions.
Solid lines = least-squares regression using all NT observations

C. Hurlin

Panel Data Econometrics

General introduction

Denitions
What are the main advantages of the panel data sets and the panel d
Issues involved in utilizing panel data
Outline of the lecture

General introduction

The heterogeneity bias.

All of these gures depict situations in which biases (on b
)
arise in pooled least-squares estimates because of
heterogeneous intercepts.
Obviously, in these cases, pooled regression ignoring
heterogeneous intercepts should never be used.
Moreover, the direction of the bias of the pooled slope
estimates cannot be identied a priori; it can go either way.

C. Hurlin

Panel Data Econometrics

General introduction

Denitions
What are the main advantages of the panel data sets and the panel d
Issues involved in utilizing panel data
Outline of the lecture

General introduction

The heterogeneity bias.

Another example: the true DGP is heterogeneous
yit = i + i xit + it
and we use all NT observations fxit , yit g to estimate the
homogeneous model.
yit = + xit + it

C. Hurlin

Panel Data Econometrics

General introduction

Denitions
What are the main advantages of the panel data sets and the panel d
Issues involved in utilizing panel data
Outline of the lecture

General introduction
In this case it is straightforward that pooling of all NT
observations, assuming identical parameters for all cross-sectional
units, would lead to nonsensical results because itwould
represent an average of coe cients that dier greatly across
individuals (the phantasm of the NT observations..)

C. Hurlin

Panel Data Econometrics

General introduction

Denitions
What are the main advantages of the panel data sets and the panel d
Issues involved in utilizing panel data
Outline of the lecture

General introduction
In this case, pooling gives rise to the false inference that the
pooled relation is curvilinear.

Fact
In both cases, the classic paradigm of the representative agent
simply does not hold, and pooling the data under homogeneity
assumption makes no sense.
C. Hurlin

Panel Data Econometrics

General introduction

Denitions
What are the main advantages of the panel data sets and the panel d
Issues involved in utilizing panel data
Outline of the lecture

General introduction

Outline of the lecture

C. Hurlin

Panel Data Econometrics

General introduction

Denitions
What are the main advantages of the panel data sets and the panel d
Issues involved in utilizing panel data
Outline of the lecture

General introduction

The lecture is organized as follows:

1

General Introduction on Panel Data Econometrics

Chapter 1. Heterogeneity and the linear model: from

the unobserved eect model to heterogeneous panel
data models

Chapter 2. Dynamic panel data models.

C. Hurlin

Panel Data Econometrics

General introduction

Denitions
What are the main advantages of the panel data sets and the panel d
Issues involved in utilizing panel data
Outline of the lecture

General introduction
References
Articles (chapter 2)
Baltagi, B.H. et Kao, C. (2000), Nonstationary panels,
cointegration in panels and dynamic panels : a survey, in
Advances in Econometrics, 15, edited by B. Baltagi et C. Kao,
pp. 7-51, Elsevier Science.
Hurlin, C. et Mignon, V. (2005), Une synthse des tests de
racine unitaire sur donnes de panel, Economie et Prvision,
169-170-171, pp. 253-294
http://www.univ-orleans.fr/deg/masters/ESA/CH/churlin_E.htm

C. Hurlin

Panel Data Econometrics