We propose a second-order correction for nonlinear fixed-effect panel models. The correction is made via the log-likelihood function. It removes the two leading terms of the bias of the log-likelihood that arises from estimating the fixed effects. Maximizing the corrected likelihood gives a second-order bias-corrected estimator, with bias OT−3, where T is the number of time periods. The corrected likelihood also gives second-order corrected test statistics. The correction applies to general nonlinear fixed-effect models with independent observations. The bias correction properties are confirmed in simulations for binary-choice models.

Bias correction, Fixed effects, Incidental parameter problem, Nonlinear panel data models
dx.doi.org/10.1016/j.jeconom.2020.04.001, hdl.handle.net/1765/126754
Journal of Econometrics
Erasmus School of Economics

Dhaene, G, & Sun, Y. (Yutao). (2020). Second-order corrected likelihood for nonlinear panel models with fixed effects. Journal of Econometrics. doi:10.1016/j.jeconom.2020.04.001