Dynamic panel data models: a guide to microdata methods and practice

This paper reviews econometric methods for dynamic panel data models, and presents examples that illustrate the use of these procedures. The focus is on panels where a large number of individuals or firms are observed for a small number of time periods, typical of applications with microeconomic data. The emphasis is on single equation models with autoregressive dynamics and explanatory variables that are not strictly exogenous, and hence on the Generalised Method of Moments estimators that are widely used in this context. Two examples using firm-level panels are discussed in detail: a simple autoregressive model for investment rates; and a basic production function.

Finite sample inference for GMM estimators in linear panel data models

We compare the finite sample performance of a range of tests of linear restrictions for linear panel data models estimated using Generalised Method of Moments (GMM). These include standard asymptotic Wald tests based on one-step and two-step GMM estimators; two bootstrapped versions of these Wald tests; a version of the two-step Wald test that uses a more accurate asymptotic approximation to the distribution of the estimator; the LM test; and three criterion-bases tests that have recently been proposed. We consider both the AR(1) panel model, and a design with predetermined regressors. The corrected two-step Wald test performs similarly to the standard one-step Wald test, whilst the bootstrapped one-step Wald test, the LM test, and a simple criterion-difference test can provide more reliable finite sample inference in some cases.

Adjustment costs and the identification of Cobb Douglas production functions

Cobb Douglas production function parameters are not identified from cross-section variation when inputs are perfectly flexible and chosen optimally, and input prices are common to all firms. We consider the role of adjustment costs for inputs in identifying these parameters in this context. The presence of adjustment costs for all inputs allows production function parameters to be identified, even in the absence of variation in input prices. This source of identification appears to be quite fragile when adjustment costs are deterministic, but more useful in the case of stochastic adjustment costs. We illustrate these issues using simulated production data.Production functions, adjustment costs, identification

Projection estimators for autoregressive panel data models

In this paper we explore a new approach to estimation for autoregressive panel data models, based on projecting the unobserved individual effects on the vector of observations on the lagged dependent variable. This approach yields estimators which coincide with known generalised method of moments (GMM) estimators for models where stationarity is not imposed on the initial conditions and for models which satisfy mean stationarity. Our approach allows us to obtain a simple linear estimator for models which satisfy covariance stationarity, which although not fully efficient performs very well in simulations.

Financial constraints and company investment

The question we address in this paper is whether the investment spending of at least some firms is affected by the availability of internally generated finance (retained earnings), reflecting some constraint on the ability of these firms to raise external finance (debt or new equity) for investment. The opposing view is that the cost at which investment funds can be obtained, taken to be independent of the amount invested, is the only financial consideration that matters in the determination of investment. This is an old question in economics, which has been the subject of several official inquiries as well as a large body of academic research. The answer to this question has a number of important implications. Profits are highly cyclical, so if investment depends directly on the availability of profits then investment spending will be more sensitive to fluctuations in economic activity than would otherwise be the case. This could be an important factor in the propagation of business cycles. If post-tax profits help to determine investment spending then the impact of company taxes on investment will be more complicated than is often assumed. In particular, the average tax rate will influence the level of investment spending, in addition to the impact of taxes on the cost of capital, and any increase in the total revenue raised from corporation tax could have a directly adverse impact on business investment. There may also be an incentive for firms with available internal funds to take over firms whose investment spending is constrained, resulting in take-over activity that would otherwise be inefficient. To the extent that financial constraints on investment spending are attributable to imperfections in capital markets or to market failures, there may also be some motivation for policy measures designed to reduce these impacts, if financial constraints are found to be pervasive.

Capital Accumulation and Growth: A New Look at the Empirical Evidence

We present evidence that an increase in investment as a share of GDP predicts a higher growth rate of output per worker, not only temporarily, but also in the steady state. These results are found using pooled annual data for a large panel of countries, using pooled data for non- overlapping five-year periods, or allowing for heterogeneity across countries in regression coefficient. They are robust to model specifications and estimation methods. The evidence that investment has a long-run effect on growth rates is consistent with the main implication of certain endogenous growth models, such as the AK model.Growth, Capital Accumulation, InvestmentS

Company dividends and taxes in the UK

The tax treatment of company dividend payments is an area where corporate taxation interacts with the personal income tax. This interaction raises some awkward issues, such as whether shareholders who are exempt from personal income tax should also be exempt from corporation tax, and if so, then how this can be achieved. The solutions adopted are often complex and certainly diverse, as witnessed by the range of different approaches used in the OECD countries, described in OECD (1991).

Stamp duty on shares and its effect on share prices

This paper provides a discussion of stamp duty and its effects. This is followed by an empirical study using changes in the rate of stamp duty in the UK as natural experiments. Because shares will be affected differently depending on how frequently they are traded, we can employ a difference-in-differences methodology. We find that the announcements of cuts in stamp duty had a significant and positive effect on the price of more frequently traded shares compared to other shares. As expected under the efficient markets hypothesis, the implementation of cuts (when at a different date from the announcement) did not affect returns differentially.Stamp duty, transaction tax, Tobin-tax, natural experiment, tax reform

Unit roots: identification and testing in micro panels

We consider a number of unit root tests for micro panels where the number of individuals is typically large, but the number of time periods is often very small. As we discuss, the presence of a unit root is closely related to the identification of parameters of interest in this context. Calculations of asymptotic local power and Monte Carlo evidence indicate that two simple t-tests based on ordinary least squares estimators perform particularly well.Generalised Method of Moments, identification, unit root tests

Trade reform design as a signal to foreign investors : lessons for economies in transition

A few years ago, many western companies were eager to consider investing in Eastern Europe and, more recently, in South Asia, where ongoing reform, large domestic markets, and cheap but qualified labor are transforming the region into a potentially fierce competitor for foreign direct investment (FDI). Although this growing interest was reflected in large commitments by foreign investors announcing major FDI reforms, actual disbursements have been modest. This reflects the investors'concern about the credibility of governments'long-term commitment to change. The credibility of policy announcements is important to investors because the returns from the sunk investment can be affected by later changes in policy. To reduce investors'concern, governments can send clear signals to show their commitment to change. The achievements of trade reform can be an effective indicator of a government's commitment to change as indicated by the strong correlation between increases in trade flows and increases in FDI disbursements. The authors examine how countries can design trade reform to speed up increases in trade. Countries can tailor their commitment to reform to foreign investors by targeting the design of these instruments to the source of their credibility problem. Governments face two credibility problems: 1) investors know the current government's policy preferences (whether they are protectionist or free trade-oriented) but ignore those preferences if the government will later have an incentive to change its position; and 2) investors are uncertain about actual government's commitment to a reform program. The model presented in the paper shows that the recommendations in favor of free trade prevail when investors know the government's preferences and have reason to doubt the government's commitment to a reform program. But in the most realistic scenario in which investors do not know the government's preferences and the policymakers cannot otherwise demonstrate their commitment to reform, a government actually committed to change may want to signal this commitment by subsidizing investments or imports if it wants to be competitive in the market for FDI. In this model, the quickest way to attract FDI is through an investment subsidy, but it is also the most costly -- an import consideration for a reforming government trying to keep tight fiscal control.International Terrorism&Counterterrorism,Economic Theory&Research,Environmental Economics&Policies,Payment Systems&Infrastructure,Trade Policy,Economic Theory&Research,TF054105-DONOR FUNDED OPERATION ADMINISTRATION FEE INCOME AND EXPENSE ACCOUNT,Environmental Economics&Policies,International Terrorism&Counterterrorism,Trade and Regional Integration