Unobserved Fixed Effects o Suppose the population model is yit=Bo+ Cd2+Bxm+…+Bxik+a1+ Here we have added a time-constant component to the error. v,=a, +u o If a, is correlated with the x's, OLS will be biased, since we a is part of the error term o With panel data, we can difference-out the unobserved fixed effect Economics 20- Prof anderson 8Economics 20 - Prof. Anderson 8 Unobserved Fixed Effects Suppose the population model is yit = b0 + d0d2t + b1 xit1 +…+ bk xitk + ai + uit Here we have added a time-constant component to the error, uit = ai + uit If ai is correlated with the x’s, OLS will be biased, since we ai is part of the error term With panel data, we can difference-out the unobserved fixed effect