Abstract:
Explicit asymptotic bias formulae are given for dynamic panel regression estimators
as the cross section sample size N 8. The results extend earlier work by Nickell
(1981) in several directions that are relevant for practical work, including models
with unit roots, deterministic trends, predetermined and exogenous regressors, and
errors that may be cross sectionally dependent. The asymptotic bias is found to be
so large when incidental linear trends are fitted and the time series sample size is
small that it changes the sign of the autoregressive coefficient. Another finding of
interest is that, when there is cross section error dependence, the probability
limit of the dynamic panel regression estimator is a random variable rather than a
constant, which helps to explain the substantial variability observed in dynamic
panel estimates when there is cross section dependence even in situations where N is
very large.
