Second-Order Corrected Likelihood for Nonlinear Panel Models with Fixed Effects

Geert Dhaene, Yutao Sun   Published : May, 2020   JEL Code: C23   URL to this Article: https://doi.org/10.1016/j.jeconom.2020.04.001

Abstract

We propose a second-order correction for nonlinear fixed-effect panel models. The correction is made via the log-likelihood function. It removes the two leading terms of the bias of the log-likelihood that arises from estimating the fixed effects. Maximizing the corrected likelihood gives a second-order bias-corrected estimator, with bias O(T-3), where T is the number of time periods. The corrected likelihood also gives second-order corrected test statistics. The correction applies to general nonlinear fixed-effect models with independent observations. The bias correction properties are confirmed in simulations for binary-choice models.

Keywords

Nonlinear panel data models; Fixed effects; Incidental parameter problem; Bias correction