Semi-parametric single-index panel data models with interactive fixed effects: theory and practice

In this paper, we propose a single-index panel data model with unobserved multiple interactive fixed effects. This model has the advantages of being flexible and of being able to allow for common shocks and their heterogeneous impacts on cross sections, thus making it suitable for the investigation of many economic issues. The asymptotic theories are established accordingly. Our Monte Carlo simulations show that our methodology works well for large N and T cases. In our empirical application, we illustrate our model by analysing the returns to scale of large commercial banks in the U.S.