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As discussed by BDM, a common way to estimate and perform inference in (5) is to ignore vgt, so the individual-level observations are treated as independent. When vgt is present, the resulting inference can be very misleading. BDM and Hansen (2007b) allow serial correlation in vgt : t 1, 2, . . . , Tbut assume independence across g. If we view (7) as ultimately of interest, there are simple ways to proceed. We observe xgt, t is handled with year dummies,and g just represents group dummies. The problem, then, is that we do not observe gt. Use OLS on the individual-level d a t a t o e s t i m a t e t h e g t , a s s u m i n g E z i g t u i g t 0

and the group/time period sizes, Mgt, are reasonably large.

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