Distribution of errors.

<p>Red lines show the distribution of errors from RE estimation, while the blue lines show the distribution of errors from FE estimation. Each panel shows the correlation between the explanatory variable and the group-level effect set to a different value of ρ (0.0, 0.3, 0.6), increasing from left to right. Simulation based on the correct specification of a model with 50 groups and 10 observations per group. 50% of the variation of the outcome variable is explained by residuals, while only 10% of the variation in the explanatory variable is within-groups.