Qualitative Description
Such models assist in controlling for unobserved heterogeneity when this heterogeneity is constant over time and correlated with independent variables. This constant can be removed from the data through differencing, for example by taking a first difference which will remove any time invariant components of the model.
There are two common assumptions made about the individual specific effect, the random effects assumption and the fixed effects assumption. The random effects assumption (made in a random effects model) is that the individual specific effects are uncorrelated with the independent variables. The fixed effect assumption is that the individual specific effect is correlated with the independent variables. If the random effects assumption holds, the random effects model is more efficient than the fixed effects model. However, if this assumption does not hold (i.e., if the Durbin–Watson test fails), the random effects model is not consistent.
Read more about this topic: Fixed Effects Model
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—Ned Block (b. 1942)
“Why does philosophy use concepts and why does faith use symbols if both try to express the same ultimate? The answer, of course, is that the relation to the ultimate is not the same in each case. The philosophical relation is in principle a detached description of the basic structure in which the ultimate manifests itself. The relation of faith is in principle an involved expression of concern about the meaning of the ultimate for the faithful.”
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