Estimating Dynamic Panel Models: Backing out the Nickell Bias

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Estimating Dynamic Panel Models: Backing out the Nickell Bias

October 2017 Number 824

JEL classification: C2, C23, C26

Authors: Jerry A. Hausman and Maxim L. Pinkovskiy

We propose a novel estimator for the dynamic panel model, which solves the failure of strict exogeneity by calculating the bias in the first-order conditions as a function of the autoregressive parameter and solving the resulting equation. We show that this estimator performs well as compared with approaches in current use. We also propose a general method for including predetermined variables in fixed-effects panel regressions that appears to perform well.

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