3. Fixed effects or first-differencing? Consider the following unobserved effects model: Yu = Bixul + +Bix +a, + Suppose you are deciding how to estimate an unobserved effects model using a panel data...

Extracted text: 3. Fixed effects or first-differencing? Consider the following unobserved effects model: Yu = Bixul + +Bix +a, + Suppose you are deciding how to estimate an unobserved effects model using a panel data set. Suppose your pan data set has 8 time periods (T = 8), and the idiosyncratic errors, u, are serially uncorrelated. Which of the following would be the preferred method of estimation? Time-demeaning the data (fixed effects estimation) is preferred. Both methods yield identical results. First-differending the data is preferred.