Quantile Regression Random Effects

Abstract

This paper develops a random effects model for quantile regression (QR). We establish identification of the QR coefficients, and develop practical estimation and inference procedures. We employ a simple pooled QR estimator to estimate the coefficients of interest, and derive its statistical properties. The random effects induce cluster dependence hence we use a cluster-robust variance-covariance matrix estimator for inference, and establish its uniform consistency over the set of quantiles. We also develop a new test procedure for uniform testing of linear hypotheses in QR models. This procedure is a modified Wald test applied on a growing number of quantiles such that, asymptotically, the test is uniform over the quantiles. We show this procedure can be applied to test the random effects hypothesis in QR panel data models. Two significant differences between our model and fixed-effects QR models are that effects of time-invariant regressors can be estimated, and that the time-series dimension can be small and finite. We provide Monte Carlo simulations to evaluate the finite sample performance of the estimation and inference procedures. Finally, we apply the proposed methods to study the roles of education and ability in wage determination. We document strong heterogeneity in returns to education along the conditional distribution of earnings.