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Thread: Fixed/Random Effects model v. OLS Regression with dummies

  1. #1
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    Fixed/Random Effects model v. OLS Regression with dummies

    Hello everyone!

    I have three consecutive waves of panel data with which I will be estimating incomes based on the Mincer equation. I have ~6,500 cases per wave.

    A few sources I read said that if you have only a few waves, then you can forego the fixed effects model and simply use normal OLS regression and introduce the waves as dummies in your equation. The reasoning being that: 1. It's easier, 2. The dummies account for any variation between waves and therefore produce the same coefficients as the fixed effects model, and 3. The output is easier to interpret.

    However, none of these sources mentioned any of the consequences of doing OLS with dummies for the three waves. Do the normal rules of regression apply? Or is there anything that I should be aware of when interpreting the results?

    Thanks in advance for your insight

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    trinker's Avatar
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    Re: Fixed/Random Effects model v. OLS Regression with dummies

    Why not run the random effects and look at the variation between waves and see if the random is warranted? That being said I don't know the Mincer equations. But the point is running a model costs very little with modern computers. Check model fits and see whether the random is warranted.
    "If you torture the data long enough it will eventually confess."
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  3. #3
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    Jake's Avatar
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    Re: Fixed/Random Effects model v. OLS Regression with dummies

    "Fixed effects model" and "OLS regression with dummies" are literally two different names for the same thing. You yourself even note in the OP that you get the same coefficients either way. So I am really not sure what to make of your suggestion of foregoing the former in favor of the latter. And yes, all the standard rules of regression apply here.
    “In God we trust. All others must bring data.”
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