Interpretations With noise in the system, the model is of the form =AC+ Bu+ Buw, y= Ca +U And the estimator is of the form =Ai+ Bu+L(y-9,y=Ci e Analysis: in this case: C-I=[AT+ Bu+Buw-[Ac+ Bu+L(y-gI A(-)-L(CI-Ca)+B
Then =1-91=1(3+:2)(3+2n 可=-1-3)=1(4-+2)(1-2+a With 1 0 O: Thus, in equilibrium, we must have ai=.2. In fact, the two firms must sit in the middle By Proposition 2.1, Pi=p?=c Discussion
Fixed Effects estimation When there is an observed fixed effect. an alternative to first differences is fixed effects estimation Consider the average over time of y Bx1+…+Bxik+a1+l The average of a, will be ai so if you subtract the mean. a will be differenced out just as when doing first differences Economics 20- Prof anderson