Consider the following dynamic wage equation Xit+ywi,t-1 + ai + Uit where wit denotes an individual's...

 

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Consider the following dynamic wage equation Xitß+ywi,t-1 + ai + Uit where wit denotes an individual's log hourly wage rate, Xit is a vector of personal and job characteristics (age, schooling, industry, etc), and a; is an unobserved individual heterogeneity component. Assume that uit is iid. Wit = (a) Explain in words why OLS applied to this model is inconsistent. (b) Explain in words why the fixed effects (FE) estimator applied to this model is inconsistent (for N ∞ and fixed T). →→→→ (c) Explain why the results from (a) and (b) also imply that the random effects estimator (RE) applied to this model is inconsistent (for N →∞ and fixed T). (d) Describe a simple consistent (N → ∞) estimator for 3, y assuming that ai and uit are independent of all Xits. (e) Describe a more efficient estimator under the same assumptions. Consider the following dynamic wage equation Xitß+ywi,t-1 + ai + Uit where wit denotes an individual's log hourly wage rate, Xit is a vector of personal and job characteristics (age, schooling, industry, etc), and a; is an unobserved individual heterogeneity component. Assume that uit is iid. Wit = (a) Explain in words why OLS applied to this model is inconsistent. (b) Explain in words why the fixed effects (FE) estimator applied to this model is inconsistent (for N ∞ and fixed T). →→→→ (c) Explain why the results from (a) and (b) also imply that the random effects estimator (RE) applied to this model is inconsistent (for N →∞ and fixed T). (d) Describe a simple consistent (N → ∞) estimator for 3, y assuming that ai and uit are independent of all Xits. (e) Describe a more efficient estimator under the same assumptions.

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a Explain in words why O LS applied to this model is inconsistent ANS WER OL S applied to this model is inconsistent because it fails to account for t... View the full answer