Panel data analysis in comparative politics: Linking method to theory

Re-analyzing a study of Garrett and Mitchell ('Globalization, government spending and taxation in the OECD', European Journal of Political Research 39(2) (2001): 145-177), this article addresses four potential sources of problems in panel data analyses with a lagged dependent variable and period and unit dummies (the de facto Beck-Katz standard). These are: absorption of cross-sectional variance by unit dummies, absorption of time-series variance by the lagged dependent variable and period dummies, mis-specification of the lag structure, and neglect of parameter slope heterogeneity. Based on this discussion, we suggest substantial changes of the estimation approach and the estimated model. Employing our preferred methodological stance, we demonstrate that Garrett and Mitchell's findings are not robust. Instead, we show that partisan politics and socioeconomic factors such as aging and unemployment as expected by theorists have a strong impact on the time-series and cross-sectional variance in government spending.