Panel Data Models with Nonadditive Unobserved Heterogeneity: Estimation and Inference," unpublished manuscript

ABSTRACT. This paper considers fixed effects estimation and inference in linear and nonlin-ear panel data models with random coefficients and endogenous regressors. The quantities of interest- means, variances, and other moments of the random coefficients- are estimated by cross sectional sample moments of GMM estimators applied separately to the time se-ries of each individual. To deal with the incidental parameter problem introduced by the noise of the within-individual estimators in short panels, we develop bias corrections. These corrections are based on higher-order asymptotic expansions of the GMM estimators and produce improved point and interval estimates in moderately long panels. Under asymptotic sequences where the cross sectional and time series dimensions of the panel pass to infinity at the same rate, the uncorrected estimator has an asymptotic bias of the same order as the asymptotic variance. The bias corrections remove the bias without increasing variance. An empirical example on cigarette demand based on Becker, Grossman and Murphy (1994) shows significant heterogeneity in the price effect across U.S. states