Panel Data Analysis: Static Models

Panel data are constructed through survey conducted over time with the same set of cross section units. Panel data can take care of inter individual differences and intra-individual dynamics by mixing cross section and time series components. It has multiple entities, each of which has repeated measurements at different time periods. Panel data econometric models examine cross section specific effects, time effects, or both to capture unobserved heterogeneity. These effects are either fixed or random. In a fixed-effects model intercepts vary across group or time period non-stochastically, whereas a random-effects model explores differences in error variance components across individual or time period. A one-way error component model captures only one type of unobserved heterogeneity by including one set of dummy variables, while a two-way model takes care of both cross section specific and time specific heterogeneity by taking two sets of dummy variables. This chapter discusses different types of panel data model in a static framework.