Dynamic panel data modelling using maximum likelihood: an alternative to Arellano-Bond
The Arellano and Bond (1991) estimator is widely-used among applied researchers when estimating dynamic panels with fixed effects and predetermined regressors. This estimator might behave poorly in finite samples when the cross-section dimension of the data is small (i.e. small N), especially if the variables under analysis are persistent over time. This paper discusses a maximum likelihood estimator that is asymptotically equivalent to Arellano and Bond (1991) but presents better finite sample behaviour. Moreover, the estimator is easy to implement in Stata using the xtdpdml command as described in the companion paperWilliams et al. (2016), which also discusses further advantages of the proposed estimator for practitioners.
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