Pesaran, M. H., Yang, L.
Trimmed Mean Group Estimation of Average Treatment Effects in Ultra Short T Panels under Correlated Heterogeneity
CWPE2364
Abstract: Under correlated heterogeneity, the commonly used two-way fixed effects estimator is biased and can lead to misleading inference. This paper proposes a new trimmed mean group (TMG) estimator which is consistent at the irregular rate of n1/3 even if the time dimension of the panel is as small as the number of its regressors. Extensions to panels with time effects are provided, and a Hausman-type test of correlated heterogeneity is proposed. Small sample properties of the TMG estimator (with and without time effects) are investigated by Monte Carlo experiments and shown to be satisfactory and perform better than other trimmed estimators proposed in the literature. The proposed test of correlated heterogeneity is also shown to have the correct size and satisfactory power. The utility of the TMG approach is illustrated with an empirical application.
Keywords: Correlated heterogeneity, irregular estimators, two-way fixed effects, FE-TE, tests of correlated heterogeneity, calorie demand
JEL Codes: C21 C23
Author links: M. Hashem Pesaran
PDF: https://www.econ.cam.ac.uk/research-files/repec/cam/pdf/cwpe2364.pdf 
Open Access Link: https://doi.org/10.17863/CAM.104875
