Bias correction and bootstrapping of error component models for panel data: Theory and applications

The wellknown Wallace-Hussain estimator is applied in pooled models with random individual effects, and the magnitude of the bias caused by the estimator is estimated by bootstrap methods. Furthermore, the significance of the bias is tested using an asymptotic test based on the bootstrap results.A preliminary version of this paper was presented at the Econometric Society European Meeting ESEM '88 in Bologna. The authors thank an anonymous referee for helpful comments. The data for one of the applications (the earnings function) are from the German Socio-Economic Panel and we thank the DIW and the Sfb 3 for the permission to use these data.