Quantile Methods in Large Panels with Fixed Effects

Abstract

We study quantile regression (QR) and instrumental variable quantile regression (QIV) in static panel data models with additive individual fixed effects. We derive the asymptotic distribution of the fixed effects estimator as both panel dimensions grow large, showing that it has an asymptotic bias of order 1/T, where T is the number of observations per individual. The bias analysis relies on a novel characterization of the profiled score as a weighted sum of induced order statistics (concomitants), which yields an exact finite-T expression for the score bias. We propose Jackknife bias corrections and uncover a bias-variance tradeoff that is specific to the non-smooth quantile objective functions. The standard delete-one Jackknife fails to eliminate the leading bias and, even when modified to achieve bias correction, inflates the variance so that only $\sqrt{N}$-consistency is attained, where N is the number of individuals. We propose a modified Jackknife bias correction for general subsample sizes, derive the asymptotic distribution of the resulting estimator, and show that $\sqrt{NT}$-consistency and valid inference are achieved for suitable choices of the subsample size. As an empirical application, we study the effect of age on school children's test scores using school fixed effects.