Which of the following is a reason for using the correlated random effects approach?
A)It provides unbiased and consistent estimators when the idiosyncratic errors are serially correlated.
B)It provides unbiased and consistent estimators when the idiosyncratic errors are heteroskedastic.
C)It provides a more efficient estimate than the fixed effects approach.
D)It provides a way to include time-constant explanatory variables in a fixed effects analysis.

Question

Quizplus · Accepted Answer

The correlated random effects approach allows for the inclusion of time-constant explanatory variables in a fixed effects analysis. This is helpful when there are important explanatory variables that are constant over time, but cannot be included in a fixed effects model as they are perfectly collinear with the individual-specific intercepts. By allowing for random effects to be correlated with these time-constant explanatory variables, the correlated random effects model provides a way to estimate their effects on the outcome variable.

Which of the Following Is a Reason for Using the Correlated