If you relegate the individual effects (wi) to the error term, you create positive serial correlation in the composite error. It occurs because individual cross-sectional units with positive errors in one period are also likely to have positive errors in other periods, and vice versa. As a result, RE estimation requires feasible generalized least squares (FGLS) rather than OLS to appropriately eliminate serial correlation in the error term and to produce the correct
standard errors and test statistics. (To find out more about FGLS, turn to Chapter 12.)