Random-effects models are
A)almost never the appropriate model in economics because the unobserved heterogeneity is typically correlated with the independent variables.
B)typically more appropriate than fixed effects models in economics.
C)preferred when the error term is random.
D)difficult to interpret because the coefficient estimates are not true marginal effects.

Question

Quizplus · Accepted Answer

Random-effects models are often inappropriate in economics because unobserved heterogeneity is usually correlated with the independent variables, violating the assumption of random effects.

Random-Effects Models Are