Random effects Start with the same basic model with a composite error, yit=Bo+Bxit +.. BKritk +a+ u Previously we ve assumed that a, was correlated with the x's but what if it's not? OLS would be consistent in that case. but composite error will be serially correlated Economics 20- Prof anderson 4Economics 20 - Prof. Anderson 4 Random Effects Start with the same basic model with a composite error, yit = b0 + b1 xit1 + . . . bk xitk + ai + uit Previously we’ve assumed that ai was correlated with the x’s, but what if it’s not? OLS would be consistent in that case, but composite error will be serially correlated