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Likelihood corrections for two-way models

Jochmans, Koen and Otsu, Taisuke (2019) Likelihood corrections for two-way models. Annals of Economics and Statistics. (In Press)

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The use of two-way fixed-effect models is widespread. The presence of in- cidental parameter bias, however, invalidates statistical inference based on the likelihood. In this paper we consider modifications to the (pro- file) likelihood that yield asymptotically unbiased estimators as well as likelihood-ratio and score tests with correct size. The modifications are widely applicable and easy to implement. Our examples illustrate that the modifications can lead to dramatic improvements relative to the maximum likelihood method both in terms of point estimation and in- ference.

Item Type: Article
Divisions: Economics
Date Deposited: 29 Nov 2019 11:09
Last Modified: 25 Jan 2020 00:14

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