Econometrics 2

Pooled Cross Sections and Panel Data I

Pooled Cross Sections and Panel D

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Pooled Cross Sections and Panel Data: Overview

Observations over individual units and time: Wooldridge

chapters 13 and 14.
Pooling independent cross sections across time (13.1-2).
Panel data: Following the same individual units across
time:

Two-period panel data (13.3-4)

General case: Two or more periods

Fixed effects estimation (13.5, 14.1)

Random effects estimation (14.2)

Four lectures to cover these chapters.

Exercises 2 and 3.
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Data structures and definitions

Cross section (tvrsnit): Observations on a set of variables in a

given period, t, for individual units i=1,2,,n:

( yit , xit1 , xit 2 ,..., xitk )

Usually think of the cross section as a random sample from some

population at time t

Two period case:

Period 1 cross section: ( yi1 , xi11 , xi12 ,..., xi1k ), i 1, 2,..., n1

Period 2 cross section: ( yi 2 , xi 21 , xi 22 ,..., xi 2 k ), i n1 1, n1 2,..., n1 n2

How are the period 1 and period 2 cross sections related?

Independent cross sections: Two independently drawn random samples:

(In general) different individual units in period 1 and period 2.
Panel data: Same n individuals appear in period 1 and in period 2.
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Pooling independent cross sections across time

Independent cross sections for two periods:

Pooled (sammenstykkede) data:

( yit , xit1 , xit 2 ,..., xitk ), i 1, 2,..., n1 , n1 1,...., n1 n2

One extreme: Estimating pooled model: y X u pooled

Other extreme: Treat the data in each cross section
separately: y X 1 u, i 1, 2,..., n 1
1

y X 2 u , i n1 1, n1 2,..., n1 n2 2

Partial pooling: Combine the cross sections but allow the

coefficients of some variables to change between cross
sections.
Pooled Cross Sections an

Pooling independent cross sections

Allow the coefficients of some of the variables to change over time:

A special case of structural change
Use dummy variables (W ch. 7): Time dummies (e.g. year dummies)
Two periods: Need one dummy variable, usually for second period:

d 2i 1 if individual i is in the period 2 sample

= 0 if individual i is not in the sample in period 2

Usually: Allow intercept to change

yi 0 0 d 2i 1 xi1 ... k xik ui

Other coefficients allowed to change as well: Interaction terms.

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Pooling independent cross sections: Testing

Testing: Is 1 constant over time? Usual t-test for 1 0 in

yi 0 0 d 2i 1 xi1 1 d 2i xi1 2 xi 2 ... k xik ui

Allow all coefficients to change over time: No gain from pooling the
cross sections
Fully interacted regression:

yi 0 0 d 2i 1 xi1 1 d 2i xi1 2 xi 2 2 d 2i xi 2
... k xik k d 2i xik ui

F-test for 0 1 ... k 0

Easy implementation of F-statistic: SSRs from pooled and separate
regressions (Chow test)
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Pooling independent cross sections

Wage regression: Example 13.2

Two independent cross sections: 1978-CPS, 1985-CPS
Data on wage, educ, exper, expersq, union, female for 1,084
workers.
Define time dummy y85. Use 1978-cross section as reference
group.
Question: Has the return to education and/or the gender wage gap
changed between 1978 and 1985.
Include above variables and y85, y85*educ, y85*female
Data in CPS78_85.in7, analyze in PcGive.
Chow test of overall regression. Is it of interest in this case? Why
not?

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Policy analysis with pooled cross sections

Example 13.3: Effect of the location of a garbage

incinerator on house prices.
Hypothesis: Having an incinerator nearby lowers the
price of a house.
Data: Prices and characteristics of houses in different
distances to the incinerator.
Two cross-sections: 1978 and 1981.
Before and after the incinerator was built in 1981.

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Policy analysis with pooled cross sections

Naive approach: Use 1981 cross section to estimate the

model
price nearinc u
0

price is the price of a house, nearinc is a dummy variable that

takes the value 1 if the house is located near the incinerator.

OLS estimates using 1981 cross section: price 101 31 nearinc

Is this a good estimate of the causal effect on house prices
of locating the incinerator nearby?
NO! Incinerator may have been located near houses that
were already cheap in 1978.
price 83 19 nearinc
OLS estimates using 1978 cross section:
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Policy analysis with pooled cross sections

Difference-in-differences approach:

House prices have gone up between 1978 and 1981 for

most houses. Whether nearby and far away from the
location of the incinerator.
Relevant question: Has the change been bigger for houses
far from the incinerator?
Need to look at differences in space (nearby/far away) of
differences in time (between 1978 and 1981): Diff-in-diff.

Regression implementation:
price 0 0 y81 1nearinc 1 y81 nearinc u

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Policy analysis with pooled cross sections

price 0 0 y81 1 nearinc 1 y81 nearinc u

Model:

0 Common change over time

1 Pre-incinerator difference in prices

1 Change in price due to incinerator

Test of the hypothesis that nearby incinerator lowers house prices:

H 0 : 1 0 vs. H1 : 1 0

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Policy analysis with pooled cross sections:

Example 13.3
price 0 0 y81 1 nearinc 1 y81 nearinc u

H 0 : 1 0 vs. H1 : 1 0

Coefficient

Standard
error

Model as
above

-12

7.5

0.17

Full set of
controls

-14

0.67

Pooled Cross Sections an

R2

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Quasi-experiments and natural experiments

Mimic controlled experiments in science by finding

something that happened naturally to one group of
people, but not to another.
Treated group: Houses nearby the location of the
incinerator.
Control group: Houses far away.
Comparing groups before and after the treatment:
Building the incinerator

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Next time

Panel data: Observations over time for the same

individual units.
W sec. 13.3-13.4: Two-period panels
No exercises this week! Will start next week.
No Econometrics 2 lecture on Thursday.
IV supplementary course starts Friday, 14-16, in Bisp
214

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