Estimating Long Run Welfare Outcome in Rotating Panel with Grouped Fixed Effects: Application to Poverty Dynamics in Peru - with Hongdi Zhao
Household welfare dynamics are often difficult to investigate due to a lack of long-term panel data. Existing methods, such as pseudo-panel and synthetic panel, are widely used approaches based on repeated cross-sectional designs, but they impose ex ante assumptions that often do not hold. This paper introduces an empirical method to estimate welfare dynamics using a rotating panel design. The paper employs the grouped fixed effects (GFE) estimator to exploit within-household variation from short-term observations and to estimate longer-term welfare and its dynamics using time-varying group-level heterogeneity, thereby relaxing a few assumptions in the previous literature. The paper applied this method to Peru's National Household Survey on Living Conditions and Poverty (ENAHO) from 2007 to 2019 and examined long-term poverty and its dynamics during this period. The new method estimates household-level poverty status and its transitions reasonably well, suggesting it as a new approach to studying household welfare dynamics at the group level and providing an interpretable grouping structure that supports richer descriptions of poverty persistence and mobility.