Panel data analysis has become popular among social scientists because it allows the inclusion of

data for N cross-sections (e.g., countries, households, firms, individuals, etc.) and T time periods
(e.g., years, quarters, months, etc.). The combined panel data matrix set consists of a time series
for each cross-sectional member in the data set, and offers a variety of estimation methods.

If the panel has the same number of time observations for every variable and every individual it
is known as a balanced panel. Often we work with unbalanced panels where we have different
numbers of time observations for some of the individuals.

The basic idea behind panel data analysis comes from the notion that the individual relationships
will all have the same parameters. This is sometimes known as the pooling assumption as we are
in effect pooling the entire individual together into one dataset and imposing a common set of
parameters across them. If the pooling assumption is correct then panel data estimation can offer
some considerable advantages. (a) The sample size can be increased considerably by using a
panel and hence much better estimates can be obtained. (b) Under certain circumstances the
problem of omitted variables which might cause biased estimates in a single individual
regression may not occur in a panel context Of course the disadvantage of panel estimation is
that if the pooling assumption is not correct then we may have problems.