What You Can—and Can’t—Do With Three-Wave Panel Data

Abstract

The recent change in the general social survey (GSS) to a rotating panel design is a landmark development for social scientists. Sociological methodologists have argued that fixed-effects (FE) models are generally the best starting point for analyzing panel data because they allow analysts to control for unobserved time-constant heterogeneity. We review these treatments and demonstrate the advantages of FE models in the context of the GSS. We also show, however, that FE models have two rarely tested assumptions that can seriously bias parameter estimates when violated. We provide simple tests for these assumptions. We further demonstrate that FE models are extremely sensitive to the correct specification of temporal lags. We provide a simulation and a proof to show that the use of incorrect lags in FE models can lead to coefficients that are the opposite sign of the true parameter values.