Error Component Model
A statistical model used in panel data analysis that accounts for individual-specific effects that are unobserved but correlated with the independent variables.
Implications
A statistical model used in econometrics to analyze panel data, where the error term is decomposed into different components to account for unobserved heterogeneity across individuals or entities, improving the accuracy of estimates and inferences.
Example
Example: An economist uses an error component model to study the impact of education on income across different regions, accounting for regional differences that might otherwise bias the results.
Related Terms
Different from standard regression models, which assume a single error term, error component models separate the error into components to better capture the complexities of panel data.
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