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h0u, tstrictly increasing in u for t 0, 1

(27)

The random variable Ui represents all unobservable characteristics of individual i. Equation (26) incorporates the idea that the outcome of an individual with Ui u will be the same in a given time period, irrespective of group membership. The distribution of Ui is allowed to vary across groups, but not over time within groups, so that

DUi|Ti, GiDUi|Gi.

(28)

where Ti is the time period and

The standard DD model can be expressed in this way, with

h0u, tu t

23

(26)

(29)

assume that

Yi0h0Ui, Ti,

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