Interview Question: Fixed or Random

Sample Question #145 (econometrics – panel data)

In panel data studies, what’s the difference between fixed effect models and random effect models? How do you decide which type of model to use when you’re working with real data?

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One Response to Interview Question: Fixed or Random

  1. Brett says:

    ANSWER
     
    In a fixed-effect model, the intercept term is taken to be a constant. In a random-effect model, the intercept term is a random variable with some expectation and variance (but is separate from the error term).  Which model is appropriate for a given dataset depends on the theoretical model we’re trying to estimate empirically.
     

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