Fixed Effects Models with Time Invariant Variables: A Theoretical Note

This paper demonstrates the equivalence between a consistent two-stage GLS estimator and the pooled OLS estimator of the coefficients on time invari-ant covariates in an unbalanced FE panel. In general the estimated standard errors differ between these two procedures. JEL: C2 Key Words: panel data, time invariant regressors It is not uncommon to find explanatory variables of interest in panel data sets that are time invariant, e.g. race, sex, regional location. In a fixed effects model these vari-ables are “swept away ” by the within estimator of the coefficients on the time varying covariates. Nevertheless, it is possible to identify and consistently estimate the ef-fects of the time invariant regressors through two-stage procedures. Hausman an