Question

describe advantages of having panel data for an empirical analysis

Answer 1

Advantages

(i) More accurate inference of model parameters. Panel data usually
contain more degrees of freedom and more sample variability than
cross-sectional data which may be viewed as a panel with T = 1, or time series data which is a panel with N = 1, hence improving the efficiency of econometric estimates

(ii) Greater capacity for capturing the complexity of human behavior than a single cross-section or time series data.

(ii.a) Constructing and testing more complicated behavioral hypotheses. For instance, consider the example of Ben-Porath (1973) that a cross-sectional sample of married women was found to have an average yearly labor-force participation rate of 50 percent. These could be the outcome of random draws from a homogeneous population or could be draws from heterogeneous populations in which 50% were from the population who always work and 50% never work. If the sample was from the former, each woman would be expected to spend half of her married life in the labor force and half out of the labor force. The job turnover rate would be expected to be frequent and the average job duration would be about two years. If the sample was from the latter, there is no turnover. The current information about a woman’s work status is a perfect predictor of her future work status. A cross-sectional data is not able to distinguish between these two possibilities, but panel data can because the sequential observations for a number of women contain information about their labor participation in different subintervals of their life cycle.

(ii.b) Controlling the impact of omitted variables. It is frequently argued that the real reason one finds (or does not find) certain effects is due to ignoring the effects of certain variables in one’s model specification which are correlated with the included explanatory variables. Panel data contain information on both the intertemporal dynamics and the individuality of the entities may allow one to control the effects of missing or unobserved variables.

(ii.c) Uncovering dynamic relationships.

(ii.d) Generating more accurate predictions for individual outcomes by pooling the data rather than generating predictions of individual outcomes using the data on the individual in question. If individual behaviors are similar conditional on certain variables, panel data provide the possibility of learning an individual’s behavior by observing the behavior of others. Thus, it is possible to obtain a more accurate description of an individual’s behavior by supplementing observations of the individual in question with data on other individuals

(ii.e) Providing micro foundations for aggregate data analysis.

(iii) Simplifying computation and statistical inference.

Panel data involve at least two dimensions, a cross-sectional dimension and a time series dimension. Under normal circumstances one would expect that the computation of panel data estimator or inference would be more complicated than cross-sectional or time series data. However, in certain cases, the availability of panel data actually simplifies computation and inference.

This is a elaborated note. Hope the concept is clear. Please rate my answer.