A potential upside of using within estimation besides the reduction in the number of parameters to be estimated is:
A) r-squared is more meaningful.
B) the coefficients will be biased.
C) the estimator will yield estimates of the fixed effects themselves.
D) the standard errors will be larger.

Question

Quizplus · Accepted Answer

Within estimation, by focusing on variation within entities (e.g., individuals, firms, countries) over time, effectively controls for all unobserved time-invariant characteristics. This leads to a more meaningful R-squared because it reflects the proportion of the variance explained by the variables that change over time within those entities, providing a clearer picture of the model's explanatory power regarding the within-entity dynamics.

A Potential Upside of Using Within Estimation Besides the Reduction