Estimation of Panel Data Models with Random Interactive Effects and Multiple Structural Breaks when T is Fixed

Abstract In this article, we propose a new estimator of panel data models with random interactive effects and multiple structural breaks that is suitable when the number of time periods, T, is fixed and only the number of cross-sectional units, N, is large. This is done by viewing the determination of the breaks as a shrinkage problem, and to estimate both the regression coefficients, and the number of breaks and their locations by applying a version of the Lasso approach. We show that with probability approaching one the approach can correctly determine the number of breaks and the dates of these breaks, and that the estimator of the regime-specific regression coefficients is consistent and asymptotically normal. We also provide Monte Carlo results suggesting that the approach performs very well in small samples, and empirical results suggesting that while the coefficients of the controls are breaking, the coefficients of the main deterrence regressors in a model of crime are not.