The Random Effect Model (REM) is a statistical model for panel data with random

parameters. In econometrics, the assumption of random effects models eliminates fixed

effects and allows for individual unique effects (λi). This model, which estimates error
variance particular to each group when the heterogeneity is not coupled with independent
factors, can be used to control unobserved heterogeneity (or times). The intercept and slope
of each regressor are the same. Individual errors, instead of intercepts, separate individuals
(or time periods) from one another. We will only work with the one-way error component
model, which contains individual particular effects, by looking at the fundamental panel data
model. With respect to the person specific effect λi, the explanatory variables are
exogenous, which means Cor(λi , xi) = 0. Individual particular effects are incorporated as an
error term in this equation.