Which of the following is a difference between a fixed effects estimator and a first-difference estimator?
A)The fixed effects estimators are always larger than the first difference estimators in a two-period panel data analysis.
B)The fixed effects estimator is more efficient than the first-difference estimator when the idiosyncratic errors are serially uncorrelated.
C)The first difference estimator is more sensitive to nonnormality and heteroskedasticity.
D)The bias in the first difference estimator depends on the time period (T) of analysis while the bias in the fixed effect does not depend on T.

Question

Quizplus · Accepted Answer

The fixed effects estimator is more efficient than the first-difference estimator when the idiosyncratic errors are serially uncorrelated because it utilizes within-individual variation over time, assuming that the error term does not autocorrelate. This makes it more efficient under these conditions compared to the first-difference estimator, which might be less efficient due to losing one observation per individual when differencing.

Which of the Following Is a Difference Between a Fixed