Determining the number of groups in latent panel structures with an application to income and democracy

• 成果类型: Article
• 署名作者: Lu, Xun; Su, Liangjun
• 署名单位: Hong Kong University of Science & Technology; Singapore Management University
• 刊物名称: QUANTITATIVE ECONOMICS
• ISSN/ISSBN: 1759-7323
• DOI: 10.3982/QE517
• 发表日期: 2017
• 页码: 729-760
• 关键词: Classifier Lasso; dynamic panel; latent structure; penalized least square; number of groups; test

摘要

We consider a latent group panel structure as recently studied by Su, Shi, and Phillips (2016), where the number of groups is unknown and has to be determined empirically. We propose a testing procedure to determine the number of groups. Our test is a residual-based Lagrange multiplier-type test. We show that after being appropriately standardized, our test is asymptotically normally distributed under the null hypothesis of a given number of groups and has the power to detect deviations from the null. Monte Carlo simulations show that our test performs remarkably well in finite samples. We apply our method to study the effect of income on democracy and find strong evidence of heterogeneity in the slope coefficients. Our testing procedure determines three latent groups among 74 countries.