Publication Type

Journal Article

Version

Publisher’s Version

Publication Date

11-2014

Abstract

We consider a latent group panel structure as recently studied by Su, Shi, and Phillips (2014), where the number of groups is unknown and has to be determined empirically. We propose a testing procedure to determine the number of roups. Our test is a residualbased LM-type test. We show that after being appropriately standardized, our test is asymptotically normally distributed under the null hypothesis of a given number of groups and has power to detect deviations from the null. Monte Carlo simulations show that our test performs remarkably well in finite samples. We apply our method to study the effect of income on democracy and find strong evidence of heterogeneity in the slope coefficients. Our testing procedure determines three latent groups among eighty-two countries.

Keywords

Classifier Lasso, Dynamic panel, Latent structure, Penalized least square, Number of groups

Discipline

Econometrics

Research Areas

Econometrics

Publication

Quantitative Economics

Volume

8

Issue

3

First Page

729

Last Page

760

ISSN

1759-7323

Identifier

10.3982/QE517

Publisher

Wiley

Copyright Owner and License

Authors

Creative Commons License

Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License
This work is licensed under a Creative Commons Attribution-Noncommercial-No Derivative Works 4.0 License.

Additional URL

https://doi.org/10.3982/QE517

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Econometrics Commons

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