The biggest difference between fixed-effects and random-effects models is that
A)fixed effects models assume that the unobserved heteroskedasticity is uncorrelated with the independent variables.
B)random effects models do not completely remove the time-invariant component of the error term.
C)fixed effects models completely remove the time-variant component of the error term.
D)random effects models are random while fixed-effects models are fixed.

Question

Quizplus · Accepted Answer

Random effects models do not completely remove the time-invariant component of the error term, which is the main distinction from fixed effects models that focus on within-entity (e.g., within-individual or within-country) variation by effectively removing entity-specific effects that are constant over time.

The Biggest Difference Between Fixed-Effects and Random-Effects Models Is That