Analysis of Panel Data
A panel has the form
where is the individual dimension and is the time dimension. A general panel data regression model is written as Different assumptions can be made on the precise structure of this general model. Two important models are the fixed effects model and the random effects model. The fixed effects model is denoted as
are individual-specific, time-invariant effects (for example in a panel of countries this could include geography, climate etc.) and because we assume they are fixed over time, this is called the fixed-effects model. The random effects model assumes in addition that
and
that is, the two error components are independent from each other.
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