Which of the following assumptions is required for obtaining unbiased random effect estimators?
A)The idiosyncratic errors are heteroskedastic.
B)The unobserved effect is independent of all explanatory variables in all time periods.
C)The idiosyncratic errors are serially correlated.
D)The unobserved effect is correlated with the explanatory variables.

Question

Quizplus · Accepted Answer

In order to obtain unbiased random effect estimators, the unobserved effect (or individual-specific effect) must be independent of all explanatory variables in all time periods. This is because if there is correlation between the unobserved effect and the explanatory variables, the random effect estimator will be biased. The other assumptions listed (heteroskedastic errors and serial correlation) do not affect the bias of the random effect estimator.

Which of the Following Assumptions Is Required for Obtaining Unbiased