Fixed-effects models are preferable to pooled cross-section models because they
A)first-difference the data.
B)control for potential heteroskedasticity.
C)control for autocorrelation.
D)remove the time-invariant component of the error term.

Question

Quizplus · Accepted Answer

Fixed-effects models remove the time-invariant component of the error term by including dummy variables for each individual in the sample. This allows for individual heterogeneity and other unobserved variables to be controlled for within the model, resulting in more accurate estimates of the coefficients of interest. Pooled cross-section models, on the other hand, do not control for such individual fixed effects and may suffer from omitted variable bias.

Fixed-Effects Models Are Preferable to Pooled Cross-Section Models Because They