, can be
estimated consistently with a QML estimator. To see why (3) must
be estimated with QML rather than (1), observe that the function
µ0 + z
′
i
θ0 controls for the correlation between ci and yi0 and
the possible correlation between ci and the elements of Xi
. By
incorporating this control function in the augmented model in (3)
it follows that, although the cross-sectional specific component ci
in the original model in (1) is correlated with yi0 and possibly the
elements of Xi
, the cross-sectional specific component ai
in (3) is
uncorrelated with yi0 and the elements of Xi
. It is because of this
difference in how the unobserved cross-sectional specific effect
is or is not correlated with yi0 and the elements of Xi that QML
estimation applied directly to the model in (1)is inconsistent when
only N → ∞ while QML estimation applied to the augmented
model in (3) is consisten