Alternative transformations to eliminate fixed effects
In a panel data model with fixed individual effects, a number of alternative transformations are available to eliminate these effects such that the slope parameters can be estimated from ordinary least squares on transformed data. In this note we show that each transformation leads to algebraically the same estimator if the transformed data are used efficiently (i.e. if GLS is applied). If OLS is used, however, differences may occur and the routinely computed variances, even after degrees of freedom correction, are incorrect. In addition, it may matter whether “redundant” observations are used or not.