Likelihood corrections for two-way models

Koen Jochmans, Taisuke Otsu

Research output: Contribution to journalArticlepeer-review

1 Citation (Scopus)


The use of panel data models with two-way fixed effects is widespread. Incidental-parameter bias, however, invalidates inference based on the (profile) likelihood. We consider modifications to the likelihood that yield asymptotically-unbiased estimators as well as test statistics that are size correct under rectangular-array asymptotics. The modifications are widely applicable and easy to implement. Through several examples we illustrate that the modifications can lead to dramatic improvements relative to maximum likelihood, both in terms of point estimation and inference.

Original languageEnglish
Pages (from-to)227-242
Number of pages16
JournalAnnals of Economics and Statistics
Issue number134
Publication statusPublished - 2019
Externally publishedYes


  • Fixed Effects
  • Information Bias
  • Modified Profile Likelihood
  • Panel Data
  • Penalization
  • Rectangular-Array Asymptotics

ASJC Scopus subject areas

  • Statistics and Probability
  • Social Sciences (miscellaneous)
  • Economics and Econometrics
  • Statistics, Probability and Uncertainty


Dive into the research topics of 'Likelihood corrections for two-way models'. Together they form a unique fingerprint.

Cite this