Error Components Models

In this chapter we discuss the error components model — probably the most commonly used approach of modelling economic relashionships using panel data. The reasons for this popularity are:1 1. Their ability to handle data bases of virtually any size. 2. The estimation and hypothesis testing methods are derived from wellknown, classical procedures. 3. Most of the problems and difficulties can be handled in the traditional framework. 4. It is the model whose theoretical frontiers have been most thoroughly investigated. 5. The estimation results are easily interpreted. 6. The most commonly used econometric and statistical software packages can be used with only minor modifications.

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