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Estimation of Semiparametric Functional-Coefficient Panel Data Models with Individual and Time Fixed Effects (304000)

Keywords: fixed effect, individual effect, time effect, LSDV, first difference, local linear regression

We consider the problem of estimating a semiparametric varying-coefficient panel data model with both the individual and time fixed effects. We extend Sun et. al. (2009) estimator to also accommodate unobservable unit-invariant common effects that may correlate with explanatory variables in an arbitrary way. The unknown functional coefficients of interest are estimated by (asymptotically) concentrating out both fixed effects via local-linear kernel-smoothed least squares dummy variable approach. We also extend Rodriguez-Poo & Soberon(2014) estimator to concentrate out both individual and time effects via local-linear kernel-smoothed first differencing two-stage approach. Monte Carlo simulations under different scenarios show that the proposed estimation procedures exhibit good finite-sample performance.