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  • Clustering standard errors by panel id

    Hi,

    I am comparing a treatment effect of a labour market policy in one country while keeping another country's observations as a control group. I decided to cluster the standard errors by country id, to allow for correlations in local labour markets. If I don't cluster, I get estimates which are not significant statistically. When I cluster, my standard errors are reduced greatly, so that they are reduced by about 10^-12, which makes my coefficients extraordinarily significant. I deduce that such reductions are due to negative intracluster correlations: I was wondering whether I should be satisfied with such reduction, or am I doing something wrong? There are some other group variables like employer id within these countries which I can cluster by, but they don't differ too much from the unclustered SEs.

    Thanks,

    Alex
    Last edited by alex badalyan; 11 Apr 2018, 00:28.
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