Random-effects models improve on pooled cross-section models because they
A)do not take advantage of the panel data nature of the data.
B)have more degrees of freedom available.
C)improve the efficiency of the estimated coefficients.
D)correct for heteroskedasticity.

Question

Quizplus · Accepted Answer

Random-effects models improve the efficiency of the estimated coefficients by allowing for individual-level variation in the intercept term, while still controlling for time-invariant unobserved factors that affect all individuals in the sample. This is not achieved by pooled cross-section models, which assume a common intercept and slope across all individuals and observations. The availability of more degrees of freedom is not a defining feature of random-effects models, and they may also be used to correct for heteroskedasticity, but this is not their primary advantage over pooled cross-section models.

Random-Effects Models Improve on Pooled Cross-Section Models Because They