Bootstrap-Based Improvements for Inference with Clustered Errors

Abstract

Microeconometrics researchers have increasingly realized the essential need to account for any within-group dependence in estimating standard errors of regression parameter estimates. The typical preferred solution is to calculate cluster-robust or sandwich standard errors that permit quite general heteroskedasticity and within-cluster error correlation, but presume that the number of clusters is large. In applications with few (5-30) clusters, standard asymptotic tests can over-reject considerably. We investigate more accurate inference using cluster bootstrap-t procedures that provide asymptotic refinement. These procedures are evaluated using Monte Carlos, including the much-cited di¤erences-in-di¤erences example of Bertrand, Mullainathan and Duflo (2004). In situations where standard methods lead to rejection rates in excess of ten percent (or more) for tests of nominal size 0:05, our methods can reduce this to five percent. In principle a pairs cluster bootstrap should work well, but in practice a Wild cluster bootstrap performs better.

Keywords: clustered errors, random effects, cluster robust

JEL Classification: C15, C12, C21