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Cambridge University Press, Political Analysis, 2(19), p. 165-169

DOI: 10.1093/pan/mpr012

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FEVD: Just IV or just mistaken?

Journal article published in 2011 by Trevor Breusch, Michael B. Ward, Hoa Thi Minh Nguyen, Tom Kompas ORCID
This paper was not found in any repository, but could be made available legally by the author.
This paper was not found in any repository, but could be made available legally by the author.

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Abstract

Fixed effects vector decomposition (FEVD) is simply an instrumental variables (IV) estimator with a particular choice of instruments and a special case of the well-known Hausman-Taylor IV procedure. Plümper and Troeger (PT) now acknowledge this point and disown the three-stage procedure that previously defined FEVD. Their old recipe for SEs, which has regrettably been used in dozens of published research papers, produces dramatic overconfidence in the estimates. Again PT concede the point and now adopt the standard IV formula for SEs. Knowing that FEVD is an application of IV also has the benefit of focusing attention on the choice of instruments. Now it seems PT claim that the FEVD instruments are always the best choice, on the grounds that one cannot know whether any potential instrument is correlated with the unit effect. One could just as readily make the same specious claim about other estimators, such as ordinary least squares, and support it with similar Monte Carlo assumptions and evidence.