Fixed-effects models are more appropriate than random-effects models when
A)the error terms are autocorrelated.
B)the independent variables are constant over time.
C)the time invariant component of the error term is correlated with any of the independent variables.
D)the error term is not constant.

Question

Quizplus · Accepted Answer

Fixed-effects models are more appropriate than random-effects models when the time invariant component of the error term is correlated with any of the independent variables. This is because random-effects models assume that the error term is uncorrelated with the independent variables, which may not be appropriate if there is a fixed effect that is correlated with the independent variables. The other options do not necessarily require the use of fixed-effects models over random-effects models.

Fixed-Effects Models Are More Appropriate Than Random-Effects Models When