Unobserved heterogeneity is one instance in where correlation between observables and unobservables may be expected. This has been a pervasive problem in cross-sectional analysis. A major motivation for using panel data has been the ability to control from the possibly correlated, time-invariant heterogeneity without observing it. This chapter analyses fixed effects models, heteroskedasticity and serial correlation, likelihood approaches, and nonlinear models with additive effects.
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